Collective Investment Trusts Versus Mutual Funds

Some experts see CITs gaining big ground in retirement plans; others see mutual funds holding them off. 

By Lee Barney | February 08, 2017
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Collective investment trust (CIT) products can cost 10 to 30 basis points less than mutual funds with similar features, according to a DST white paper, “Collective Investment Trusts—A Perfect Storm.”

And even a half-a-point or two-point cost reduction can be reason enough for a plan sponsor to switch from a mutual fund to a CIT, according to DST. In fact, the firm projects that CIT assets in retirement plans could rise from $1.9 trillion at the end of 2015 to $3.1 trillion by the end of 2018—a 63% increase.

Most experts that PLANADVISER spoke with agree that because of their lower costs, CITs are slowly but steadily making inroads into retirement plans. However, Joel Lieb, director of defined contribution advisory at SEI Institutional in Oaks, Pennsylvania, says that with the exception of plans with $1 billion or more in assets, the plans that SEI advises as a 3(38) fiduciary all have mutual funds as their core menu. Unlike DST, Lieb maintains that the cost advantages of CITs over mutual funds are only around five basis points, down from around 10 basis points a decade ago. This is due to product improvements and changes in the way mutual fund companies price their offerings.

Likewise, SunTrust Institutional Investments of Atlanta has not witnessed considerable movement by plan sponsors to embrace CITs, says Philip Pounds, director of client experience at the firm. Instead, SunTrust’s clients are primarily gravitating to the retirement and institutional share classes that mutual funds are increasingly offering, he says. In fact, Pounds says, “four to five years ago CITs looked like they might take off,” but the mutual fund industry cleverly and ingeniously countered by offering zero-revenue share and institutional share classes.

On the other hand, “there has been a strong trend among the large plans that Aon Hewitt serves to welcome CITs,” says Win Evens, director of human resource outsourcing investment solutions, based in Chicago. “With the power of compounding, eliminating fees from 100 basis points to 75 basis points can have a profound impact over a person’s career,” he says.

In addition, whereas the early CITs did not offer daily valuation capabilities, modern CITs do, and “they are well supported by the recordkeeping industry these days,” Evens says. As DST notes, in 2000, the National Securities Clearing Corporation added CITs to its mutual fund trading platform, making it possible for the vast majority of CITs to trade and price daily.

NEXT: Other benefits of CITs