The role of Collective Investment Trusts and fiduciary considerations

A CIT is a pooled investment vehicle maintained by a bank or trust company and available to eligible retirement plans and trusts. Unlike mutual funds, CITs are not registered under the Investment Company Act of 1940. This structure allows for lower fees and product flexibility but also creates certain differences in plan documentation, disclosure, reporting, and platform accessibility.

Many of the asset managers who have historically focused their distribution resources on the defined contribution marketplace have created CITs in an effort to deliver a cost-effective and flexible offering. CIT investment strategies are generally substantially similar versions of popular mutual fund strategies, and they are usually available to any eligible plan, subject to asset minimums.

Lower relative fees are the biggest selling point for CITs, which is made possible because they are institutional trust vehicles available only to eligible retirement plans. Unlike mutual funds, CITs are generally exempt from SEC registration and many mutual fund reporting requirements, which can reduce costs related to prospectus filings, shareholder reporting, retail distribution, advertising, and marketing. That said, similar to mutual funds, CITs fees can vary depending on the share class and availability can be limited based on asset minimums or negotiated arrangements.

Beyond fees, there are several important issues that plan sponsors should evaluate before proceeding. Below is a summary of the primary considerations. 

• Regulatory framework: As mentioned above, CITs operate under a different regulatory framework than mutual funds. The Securities & Exchange Commission does not have oversight over CITs and certain information that plan sponsors and participants are accustomed to reviewing such as a prospectus is not available. CITs are overseen by the Office of the Comptroller of the Currency (for national bank trustees) or state banking regulators (for state-chartered trust companies), and are subject to ERISA's fiduciary standards when holding plan assets. Understanding this structural difference is important.
• Participation agreements: Related to the above point, CITs rely on trust documents and participation agreements rather than a fund prospectus, causing the plan sponsor to enter into agreements when selecting a CIT for the plan menu. These agreements must be reviewed prior to signing, which creates the need for plan sponsors to commit additional time and resources. CIT documentation may also introduce different – and in some cases incremental – audit and disclosure considerations, including Form 5500 reporting requirements, depending on the structure of the trust and the availability of underlying investment information. 
• Strategy differences: In certain cases a CIT may share the naming convention and seek to mimic a popular mutual fund strategy. However, there could be meaningful differences that create positive or negative divergence in return, even net of the lower fees. Even where a CIT seeks to replicate a mutual fund strategy, differences in portfolio management flexibility, cash management, securities lending, and other operational factors may lead to performance divergence, therefore, plan sponsors should work with their consultants to truly understand the strategy differences and compare performance to the mutual fund.
• Limited performance history: Because CITs are separate legal investment vehicles from mutual funds, historical performance does not carry over in reporting as it would with a new mutual fund share class. When a CIT is seeded, it has no track record, even if the mutual fund strategy it replicates is long-standing. A relatively new CIT’s shorter track record makes performance difficult to evaluate. A plan sponsor must be confident that the mutual fund version’s performance history can stand in as a legitimate proxy for the CIT.
• Investment policy statement: The lack of performance history for a recently seeded CIT may create challenges relative to a plan sponsor’s current Investment Policy Statement (IPS) criteria. Therefore, it may be prudent for a plan sponsor to review their IPS to determine if the language is flexible enough to account for a limited direct track record for a CIT.
• Transparency for participants: While it has improved over time, CIT performance reporting has historically been less timely and not as publicly available as mutual fund reporting. For instance, the majority of CITs do not have tickers and are difficult to locate on popular public performance reporting sites like Yahoo Finance and Morningstar. This can create questions from participants.
• Availability: Recordkeeper availability may be limited, so validation with the recordkeeper that a particular CIT can be traded on their platform is important.

Using CITs can be part of a thoughtful strategy for plan sponsors, as long as they understand their current fees compared to the CIT fees, and the trade-offs related to the considerations listed above. As always, documentation is key. When thinking about using CITs, it is a best practice to amend your investment decision process to include an investment vehicle selection component that addresses these considerations. Fee savings alone does not fully validate the decision to use CITs in the plan’s investment menu.

Recommended actions for plan sponsors include:

• Evaluating CITs in context, not just in comparison to mutual fund fees
• Understanding portability, governance, and investment reporting implications up-front
• Clearly documenting the decision and rationale related to the specific CIT use case
• Periodically reassessing whether the chosen structure continues to serve participants’ best interests

CITs are neither inherently better nor worse than other investment vehicles. When sponsors understand the role of CITs in the marketplace and the key considerations associated with this investment vehicle, they are better positioned to make decisions that align with their plan’s objectives and fiduciary responsibilities.

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