Art by Lars Leetaru

Collective investment trusts have taken the defined contribution investment world by storm in the past decade.

The pooled investment vehicles, which are held by a bank or trust, have overtaken mutual funds as the most prevalent investment vehicle in defined contribution savings plans, according to consultancy Callan’s most recent DC Index. In addition, analysts at Morningstar say CITs are poised to become the most used target-date-fund strategy in 2024, a potentially watershed moment for the “set-it-and-forget” retirement savings tool.

CITs, known for taking more paperwork and setup for a plan sponsor than adding a mutual fund to a plan lineup, appear to be making up for that friction by offering lowering fees. But what kind of savings does a CIT really provide when compared with mutual funds, previously the most popular investment vehicle in retirement plans due to their diversity and ease of use?

Using a CIT can save, on average, 15 basis points, or 0.15%, due to lower administration, marketing and management fees, says Toby Cromwell, senior director for CIT funds product management and development at Broadridge Financial Solutions.

“Historically, one of the selling the points of a CIT is that you have a lot less shareholder noise and, with that, lower fees,” Cromwell says. “There is a lot more asset movement in a mutual fund, whereas a CIT is much more sticky, with money staying invested there for a longer period of time once it’s invested.”

When comparing a fee of 50 bps (0.50%) to one of 35 bps (0.35%) on $100,000 over 20 years, the savings do not look like much. For example, assuming an 8% annual growth rate, a participant is pocketing about $700 more by choosing a CIT. But multiply that potential savings by thousands of participants in a plan, as well as the raft of excessive fee lawsuits going after plan committee and adviser choices, and the CIT becomes a compelling option for plan sponsors, says Megan Pacholok, a senior manager research analyst at Morningstar Research Services.

“A larger plan sponsor can negotiate their fees, and that larger base can bring a lower cost than mutual funds,” Pacholok says. “As they weigh in the excessive fee lawsuits around more expensive TDF options, CITs are a compelling option.”

Those lawsuits often include plaintiff allegations that a plan sponsor or fiduciary adviser stuck to one mutual-fund-backed TDF without exploring lower-fee options.

Steven McKay, head of global defined contribution investment only and institutional management at Putnam Investment, says demand for CITs has grown in part due to that fee pressure. But there is also “tremendous growth” due in part to increased transparency and the ability to benchmark CIT options against each other.

“We live in a world of benchmarking options against the competition or against the best,” McKay says. “It’s very important to the fiduciary advisers or the plan sponsors to have access  to benchmarking to compare options.”

The broadening uptake of CITs has created a somewhat virtuous cycle, McKay notes, as increased use has mostly done away with minimum asset requirements for CITs, which further broadens both the demand and case for innovation.

“We’ll continue to look at growing our CIT suite and strategy as client demand continues to grow,” he says. 

Moving Down Market

While large plans have started the CIT trend, the ease of use and increased transparency of the investment offerings are making them more compelling for mid-market and even smaller plans as well, says Julie Wimer, director of client service and product at Great Gray Trust Company, the new company formed from Wilmington Trust NA’s former CIT division, which was purchased by private equity firm Madison Dearborn Partners LLC.

“We are starting to see more plans in the small and midsize market take advantage of CITs,” Wimer says. “From a fiduciary standpoint, they are tasked with the overall prudence of the investment lineup, and part of that is to not only look at investment strategy, but also the fees as well.”

Great Gray, which can act as the trust on its CIT offerings, looks to make CITs an easier-to-use option for plan sponsors with a digital onboarding process. In the past, that onboarding could be onerous, as the sponsor had to sign a participation or adoption agreement to invest in a CIT.

“We need to make sure we are only putting qualified money into the CIT—the second that you put in a plan that is not eligible, it won’t work,” Wimer says.

Another stumbling block for CITs had been transparency of the investments. Unlike mutual funds, which are publicly listed, CITs were often off the radar and only visible to the advisers, plan sponsors and participants.

The former Wilmington Trust division, now Great Gray, has worked to improve that transparency in the hopes of increasing market uptake. In 2019, the trust announced a partnership with the Nasdaq Fund Network to show searchable tickers for CITs—giving them six letters instead of the five usually used for mutual funds.

“That myth that was out there that it’s so hard to add a CIT to plan has gone away, and it has become more sensible in that small and mid-market,” Wimer says. “That is why we are starting to see growth there, and I would expect to see more growth in that area going forward.”

McKay of Putnam notes that the firm offers both in-house trust services for CITs as well as use of third parties depending on client need.

“This is important because we work with a lot of plan service providers and a lot of large intermediaries and aggregators,” he says. “Sometimes they want to have access to Putnam CITs, but while working with other trust companies.”

Advising the Advisers

Cromwell of Broadridge says he has seen more interest in CITs among smaller-and midsize plans. But he has also been in discussion with sub-advisers who manage funds that want to add CITs to their investment mix. Cromwell says subadvisers have the experience creating target-date funds, large-cap funds and mixed-income funds, and they see the CIT as a way to provide the same investments with lower fees.

“With the CITs, you’re going to see roughly whatever performance that manufacturer or investment manager can put up without those trustee fees or expenses,” he says. “Performance is key, because you get better outcomes for participants because of lower expenses and the compounding of accounts over long periods of time.”

Cromwell notes that the regulatory burden on CITs, once they are set up, is often less onerous than that shouldered by mutual funds, which are overseen by the SEC. CITs, instead, are overseen by state regulators and the Department of the Treasury’s Office of the Comptroller of the Currency because the investment vehicle sits within a trust or bank.

That said, plan sponsors and advisers should understand that CIT disclosures should have the same rigor as any other DC investment.

“We view disclosure as basically the same as the mutual fund in terms of fees for the plan sponsor and participant,” he says. “We need to make sure that we are catering to ERISA and the DOL, because by the the nature of the CIT, it can only be ERISA plans that use it.”

Like many trends in the retirement space, it has taken years for the CIT to take hold, and it is only recently that smaller plans have gotten access to the investment vehicle thanks to advances in technology and practices that have lowered the plan asset threshold for entrance, Cromwell says.

“Now you are seeing a democratization for the DC plan,” Cromwell says of CIT use. “I don’t think just because you work for a large plan, you should get a much bigger deal than someone with a smaller plan. That democratization is key and already starting to happen in the CIT space.”