investment-oriented | PLANADVISER March/April 2016

The Appeal of CITs

Not your father's investment strategy

By Rebecca Moore | March/April 2016
Page 1 of 4
Art by Kyle Stecker
Transparency, lower fees and customization are spurring growth of collective investment trusts (CITs) in the retirement plan space.

From the 1980s into the early 1990s, CITs, which are pooled funds run by banks, were a common investment vehicle in defined contribution (DC) plans. Shelby George, senior vice president of adviser services at Manning & Napier in Rochester, New York, explains that when 401(k) plans moved to daily valuation in the mid-1990s, CITs, which then were mainly valued quarterly, were left behind. But now these funds are constructed more like mutual funds, and daily valuation is possible.

Jeff Masom, co-head of sales at Legg Mason in Baltimore, agrees, noting that when many mutual fund firms established institutional share classes, with lower overall expense ratios, these became more competitive than CITs. Also, many CITs lacked a long-term track record.

But, George says, the biggest innovation in the funds is that reporting—e.g., disclosures about what a CIT invests in, pricing and historical performance data—is available to investors now, whereas it was not before. In addition, the funds offer more flexibility in pricing and a potential for lower costs.

CIT use is definitely growing. For example, Jeff Kletti, head of investments at Wells Fargo Institutional Retirement and Trust in Minneapolis, says his firm saw a 37% increase in the number of CITs offered in the retirement plans it recordkeeps, plus a 57% increase in CIT assets, between the end of 2012 and of 2015. “Without question, we’ve seen more growth in the small to midsize plan market,” he says.

Pricing Flexibility and Lower Costs
CITs are regulated differently than are ’40 Act funds—those under the Investment Company Act Of 1940, George says. “Some FINRA [Financial Industry Regulatory Authority] and SEC [Securities and Exchange Commission] requirements do not apply to CITs, so, from an operational standpoint, managers have operational efficiencies that may lower costs because [the funds] don’t have the same technology and reporting requirements as ’40 Act funds [do].” CITs often allow for more flexible pricing, as they may be customized for a particular plan, she adds.

Robert Barnett, administrative vice president, head of retirement distribution at Wilmington Trust in Boston, notes that CITs can create share classes based on assets.