Collective investment trusts are emerging as a cost-effective alternative to mutual funds for defined contribution plan assets. While they have been available for years, collective investment trusts, or CITs, are experiencing a resurgence as plan sponsors have become disenchanted with high mutual fund fees and concerned over fee litigation.
Similar to mutual funds, CITs pool investors’ assets into a single portfolio and invest in a range of securities including stocks and bonds. However, unlike mutual funds, CITs are offered only through qualified retirement plans and are not registered with the SEC. Instead, they are subject to Department of Labor and bank rules and regulations.
The exempt status of CITs from SEC registration creates attractive benefits for plan sponsors. Typically, CITs have substantially lower fees than mutual funds, because they do not have to comply with SEC regulations or market to retail customers. CITs also permit plan sponsors to negotiate their management fees. Together, these cost advantages translate into lower fees paid by plan participants and result in higher investment returns.
Additionally, CITs have flexibility to invest in hedge funds, exchange traded funds, mutual funds and other alternative investment vehicles.
However, CITs do have substantial differences compared to mutual funds. For example, product disclosure is often less extensive and performance and holding information is less accessible. Moreover, CITs cannot be rolled over into an individual retirement account when the participant leaves the qualified retirement plan.
Nevertheless, CITs are becoming a popular alternative to mutual funds for plan sponsors seeking lower costs and greater investment flexibility.