John E. Chapman
Chief Executive Officer
For many years, the investment vehicle of choice within retirement plans has been mutual funds. These investment vehicles are registered with the Securities and Exchange Commission (SEC) and pool together monies from many sources for the purpose of investing in stocks, bonds or other assets. Because of the broad acceptance of mutual funds, they cover a broad range of investment strategies, providing acceptable coverage to plan sponsors and plan participants alike. The fact that they are registered with the SEC allows for easy access of information, something that appeals to plan sponsors and participants alike as their ticker symbols are easily identified. Mutual funds generally have a lower investment threshold, providing access to even the smallest of retirement plans.
Now, the use of Collective Investment Trusts (CIT) in retirement plans is growing. By the end of 2023, 84% of plan sponsors had offered CITs as part of their fund options, with target-date fund strategies driving much of the growth, according to the Callan Institute’s 2023 Defined Contribution Trends Survey.* More plan sponsors are choosing CITs over mutual funds for a number of valid reasons, including efficiency, flexibility, and the ability to negotiate costs.
CITs are tax-exempt investment vehicles that are similar to mutual funds in their implementation but different in their structure and regulation. They have seen rapid adoption in recent years for their flexible structure, streamlined reporting requirements and, often, lower costs and fees. CITs are often easier to administer for large plans since they are designed specifically for institutional investors, which have less chance of running into minimum funding requirements based investment strategies than are typically available in traditional mutual funds.
Total CIT assets have doubled over the past decade due to its increased adoption among 401(k) plans. In 2022, total CIT assets were $4.6 trillion and comprised 37%, or about $2.5 trillion, of total 401(k) plan assets. CIT growth has come primarily at the expense of mutual funds, which saw their share of 401(k) assets decline to 42% of total 401(k) assets.* The most dramatic growth area for CITs has been within target-date funds. CITs reached 49% of target-date market share at the end of 2023, and it appears that as of June 2024, they have surpassed mutual funds, reaching 50.5% of the market.* Some of this growth can be credited to the fact that CITs operate within their own regulatory oversight and governance framework, which is different than mutual funds.
CITs are subject to banking regulations and certain tax and ERISA-related regulations but, unlike mutual funds, they are not regulated by the SEC and are generally not subject to the Securities Act of 1933 or the Investment Company Act of 1940. CITs are overseen by a trustee, typically a sponsoring bank entity that acts in a fiduciary capacity. While some participants like to have a ticker symbol available, many do not have a strong opinion. Most CIT providers offer quarterly fact sheets that show the fund’s largest positions, sector exposures, and performance. For plans that feel strongly about providing participants with a ticker symbol, there are now 600+ CITs registered on the Nasdaq Fund Network.**
Also, if a particular strategy or investment model doesn’t already exist, it can be quicker to launch it as a CIT than as a mutual fund. Because there are fewer legal and regulatory considerations, CIT providers have made fund launches a highly efficient turnkey process with quicker speed to market.
Regardless of the investment vehicle, plan fiduciaries are responsible for the prudent selection and ongoing monitoring of the investment strategies offered in the plan menu. This can include, but is not limited to, regularly reviewing investment performance, understanding changes to processes and reviewing fees. It’s good practice for this review process to be documented while making sure it is in accordance with the plan’s investment policy statement (IPS).
As the retirement plan industry has evolved, so too has the structure of investment vehicles used in Defined Contribution plans. Today, plan sponsors have more investment vehicles and share classes from which to choose. This abundance of choice can make it easier to find the most appropriate vehicle for the plan, although that introduces some complexity into the investment vehicle selection. CITs, which were once limited to the largest DC plans, are now available to a broader swath of plans due to decreasing required minimum investments. CITs are becoming increasingly attractive to plan sponsors because of the potential fee advantages they may present compared to mutual funds.
Because CITs are afforded some flexibility when it comes to fees, there are several fee-related nuances and decisions for plan sponsors to consider. Understanding how fees will be assessed and charged is one of the most important steps in determining whether CITs are appropriate for a particular plan.
While CITs have garnered attention for being less expensive than mutual funds, they are not always the cheapest vehicle. For example, an R6 mutual fund share class (a type of share class only available through employer-sponsored retirement plans) that is at scale may be more competitively priced than a CIT equivalent with fewer assets. Yet, for the largest DC plans a separate account may present the most economical fee structure. A process for exploring these pricing differences is key for plan sponsors.
CITs may help plan sponsors meet their fiduciary duties to plan participants by providing a compelling lower cost, diversified investment vehicle. This could make CITs an attractive alternative to mutual funds for retirement plan sponsors to make available to their participants. If you still have questions, let’s start a conversation to see if CITs may be a fit inside of your retirement plan as an option for your participants.
*Source: Cerulli Associates, The Cerulli Report – “U.S. Retirement Markets 2023: Analyzing the Impact of Retirement Legislation.”
**Source: Nasdaq Fund Network Driving Transparency for Collective Investment Trusts, presentation March 2021
