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