Are Collective Investment Trusts a Good Choice for Your Employees’ Investment Menu?

Investment reviewSince its inception, the 401(k) plan has risen to become the most popular employer-sponsored retirement plan in the US. Millions of working Americans put a portion of their paycheck into a 401(k) to save for life after work. While there are many vehicles to help investors save for tomorrow, one that is growing in popularity is the use of collective investment trusts (CITs). These saving vehicles provide individual 401(k) investors the purchasing power of large institutions with improved better pricing. CITs are essentially the Costco or Sam’s Club of the investment world. Finding the vehicle that best aligns with your employee benefits should be top a priority for an organization and their committee members. 

How are CITs different from mutual funds?

CITs have a lot in common with mutual funds. They typically share the same investment philosophy and management style as their respective mutual fund counterpart, but they also have distinct differences. For starters, mutual funds tend to carry higher expense returns, offer less flexible pricing structures, and have higher distribution costs compared to CITs. Mutual funds and CITs have similar reporting data and while reporting can vary by provider, most CIT providers offer daily prices, and monthly net and gross performance. As with all investments, CITs assume an amount of risk and there is no guarantee from the bank or any regulatory authority they’ll be profitable.

What makes CITS unique?

All investment funds are regulated in one way or another, but CITs are regulated by the Office of the Comptroller of Currency, and as a result have more leeway in how they can invest- including the use of long-short strategies, securities hedging, and alternatives asset classes.

According to a DST white paper, “Collective Investment Trusts—A Perfect Storm” a CIT can cost 10 to 30 basis points less than mutual funds with similar features. While even half a point in cost reduction can be enticing for a plan sponsor to switch an investment option, the amount of cost reduction can make CITs quite attractive. But Plan Fiduciaries need to exam more than cost.

Are CITs Right for Your Plan?

CITs will not be the perfect fit for every 401(k) plan. When considering your investment options a few key questions to ask are:

  1. Are there any liquidity boundaries or restrictions?
  2. Will the cost structure be appropriate for your plan size?
  3. What sort of reporting will be required for your plan participants?

Depending of the scope of your plan, CITs may not be feasible for your company. Ultimately, investment platforms can offer numerous types of investment vehicles for retirement plans. Today, it’s more important than ever for plan fiduciaries to understand their options, the costs, performance and risk associated with each option, and determine which line-up can align best with their employee’s needs.