Three reasons CITs are gaining in popularity
It's projected that by the end of 2024, assets in target-date collective investment trusts will top those in target-date mutual funds.¹ What's behind the trend? Following are three reasons why CITs have grown so popular among retirement plan sponsors and participants—and, in turn, why they could be important to your retirement practice.
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What is a CIT?
A collective investment trust (CIT) is a tax-exempt, pooled investment designed exclusively for use in certain ERISA-qualified retirement plans. Unlike mutual funds, which are offered by investment management firms, CITs can only be offered and managed by banks and trust companies.
As you decide whether they might be suitable for a client’s investment lineup, consider the following three characteristics, which are helping to drive their popularity.
1 CITs offer similar investment opportunities as mutual funds
When it comes to the way underlying investments are chosen and managed, there’s a lot of similarity between a CIT and a mutual fund. In fact, CITs and funds can have common strategies and mandates and, in cases where the entities that offer both options are part of the same company, they may share management teams.
CITs and mutual funds: similarities and differences
CITs |
MUTUAL FUNDS |
|
Investment options |
Can be wide ranging or targeted, depending on the objective |
|
Management style |
Can be active, passive (index funds), or hybrid |
|
How do they get into retirement plans? |
Offered directly by banks or trust companies |
Offered directly by investment management firms or through financial intermediaries |
How is investment management governed? |
Must be managed by the bank or trust company but may be assisted by subadvisors
Supervised by the bank’s or trust company’s board of directors |
Investment managers are approved and supervised by the fund’s independent board of directors
|
Just as with a mutual fund, you’ll want to let your plan’s investment strategy and offering documents guide you in weighing a CIT’s suitability for a plan lineup.
CITs can be used in various types of qualified retirement plans2 and can cover a full spectrum of investment objectives. Three-quarters of the CIT assets held in defined contribution (DC) plans are in U.S. equity and target-date strategies.
Which CITs gather the most DC plan assets?
Distribution of assets by strategy
Source: "The Cerulli Report: U.S. Defined Contribution Distribution 2023, Cerulli Research. Data represents trusted assets as of year-end 2022.
2 CITs can be relatively lower in cost
In general, asset-based fees for CITs may be lower than mutual fund institutional shares. There are a couple reasons for this.
Offered by banks and trust companies just for use in workplace retirement plans, CIT operations can be leaner than a mutual fund’s. A bank and/or trust company must exercise investment authority over a CIT, but may rely on the assistance of an affiliated or third-party subadvisor.3 In fact, if a CIT mirrors a mutual fund, the same investment team might manage it. This can create efficiencies.
Because CITs aren’t subject to U.S. Securities and Exchange Commission (SEC) regulation, they’re exempt from the registration, reporting, and broker-dealer marketing requirements that apply to mutual funds. And this, in turn, results in savings for the trust company or bank that offers the CIT—savings that can be passed along to plan sponsors and participants in the form of lower fees.
Although they’re generally exempt from SEC regulations, CITs aren’t free from oversight; rather, they’re subject to regulation by federal and state bank regulators, by the IRS, and under the U.S. Department of Labor’s rules for ERISA fiduciaries.
Fee structures for CITs are typically based on the services provided to clients and the types of assets being managed. Unlike mutual funds, CITs have the flexibility to negotiate fees; for example, plans of all sizes may benefit from pricing based on the aggregate investment of plans using the same intermediary or recordkeeping platform.
3 The CIT investing experience is really no different for participants
Some plan sponsors might assume that because CITs aren’t public investments and subject to SEC rules, they might introduce new risk or inconvenience for participants. In reality, the investing experience is very similar to what participants get with mutual funds.
For example:
- The trust companies and banks that offer CITs are often well-known financial entities—or owned by companies that are.
- The makeup of a CIT portfolio and the management team itself may be identical to its mutual fund equivalent.
- CITs provide for daily pricing, ready liquidity, and timely performance reporting—investment features that participants have come to rely on.
- These investments can fit seamlessly into the participant experience, including access and tracking through a plan website, the availability of fund fact sheets and other collateral, and daily crediting of transactions.
Given the trends, consider if CITs are suitable for your toolbox
Given the risk of ignoring lower-cost investment options and the growing popularity of CITs, it’s important for plan professionals to be knowledgeable about these products—and have some well-researched options at your fingertips.
Ask your plan recordkeepers and DCIO contacts about collective investment trusts, including which offerings might be appropriate for your client base.
1 “2024 Target Date Strategy Landscape," Morningstar Manager Research. Based on data as of Dec. 31, 2023. 2 These include Section 401(a) plans, Section 457(b) governmental plans, Section 403(b)(7) custodial accounts, Section 403(b)(9) retirement income accounts, and Section 401(a)(24) governmental plans. 3 In all cases, the bank or trust company offering a CIT must maintain substantial investment authority.
Important disclosures
The target date is the expected year in which investors in a target-date portfolio plan to retire and no longer make contributions. The investment strategy of these portfolios is designed to become more conservative over time as the target date approaches (or, if applicable, passes) the target retirement date. Investors should examine the asset allocation of the portfolio to ensure it is consistent with their own risk tolerance. The principal value of your investment, as well as your potential rate of return, is not guaranteed at any time, including at, or after, the target retirement date.
This is not an offer to sell units of the trust, and the trust is not soliciting offers to buy units of the trust, at any time in any jurisdiction in which the offer or sale is not permitted. Units of the trust are only offered to eligible qualified employee benefit plans in the sole discretion of the trustee. Descriptions of the trust, which include the objectives, risks, charges, expenses, and other important information, should be carefully read and considered together with the declaration of trust, the participation agreement, and the fund declarations before investing, copies of which are available to qualified investors on request from John Hancock Trust Company or Global Trust Company (John Hancock Stable Value Fund). The trust document may only be available in English.
Collective investment trusts are privately offered. Information on this investment is not available in local publications.
Collective investment trusts are offered through banks or trusts overseen by state or federal bank regulators and are subject to the federal laws governing retirement plan fiduciaries. Mutual funds are offered through registered investment companies overseen by the SEC.
CITs maintained by John Hancock Trust Company, LLC, 197 Clarendon Street, Boston, MA 02116, 800-225-6020, jhinvestments.com.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
John Hancock Retirement Plan Services LLC offers administrative and/or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in NY), and John Hancock Life Insurance Company of New York, Valhalla, NY. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC.
John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds, member FINRA, SIPC.
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