CITs Fit Well With Best Interest Service

Among the attractive but less-often-discussed features of collective investment trusts is the fact that the sponsoring trustee—a bank or trust company—must commit to acting in the best interest of unit holders.

A new white paper published by Wilmington Trust documents the dramatic ongoing expansion of the U.S. collective investment trust (CIT) marketplace.

The paper, “Collective Investment Trusts: An Important Piece in the Retirement-Planning Puzzle,” was penned by a trio of CIT experts including Rob Barnett, group vice president and head of intermediary sales for Wilmington Trust; Jason Roberts, CEO Pension Resource Institute and managing partner at Retirement Law Group; and Jessica Sclafani, director and defined contribution (DC) strategist for the investment solutions group at MFS.

As the trio explains, CITs are not newcomers to the retirement landscape. Although first launched in 1927, they did not become broadly used until the 1950s when Congress first allowed banks to combine assets from stock bonus plans, pensions and corporate profit sharing plans.

“CITs are not necessarily new vehicles to plan sponsors, either, as they have long been used by defined benefit (DB) plans and large defined contribution (DC)plans,” the paper says.

As their popularity has grown, the retirement plan marketplace has become more aware of the salient features of CITs, including for example, the fact that since they are not registered under the Investment Company Act of 1940, they are principally overseen by the Office of the Comptroller of the Currency or state banking regulators. One feature that the paper suggests is underemphasized is the fact that the sponsoring trustee of a CIT—generally a bank or trust company—is necessarily committed to acting in the best interest of unit holders because it is bound by the fiduciary standard under the Employee Retirement Income Security Act (ERISA).

Despite their association with the retirement market, the paper explains, CITs are not permitted for use by individual retirement account (IRA) owners.

CITs, TDFs and Transparency

According to the trio, target-date funds (TDFs) are one very clear example where CITs have experienced an increase in the amount of assets under management (AUM). In 2018 alone, assets in target-date CITs increased by approximately $30 billion to reach an estimated $662 billion.

“This growth reflected the DC market’s willingness to embrace a less familiar investment vehicle, relative to a mutual fund, in order to access lower pricing,” the researchers note. “Robust growth in target-date CITs has spilled over into single-asset-class options on the core menu, with advisers realizing that if they are comfortable with a target-date CIT, they also can consider the vehicle in other investment categories.”

The researchers suggest that DC plans’ embrace of CITs shows it is “merely a myth” that CITs are less transparent than mutual funds. This is a common assertion put forward based on the fact that CITs don’t have a stock ticker in the same way as a mutual fund.  

“Most fund managers create quarterly fact sheets for their CITs and provide a data feed to aggregators, such as Morningstar,” the paper suggests. Investment managers are also increasingly partnering with stock exchanges and other stakeholders to roll out “CIT tickers.” According to the trio, at the time of the publication of their analysis, more than 250 such tickers were already available.

Important CIT Considerations

The paper goes into detail to discuss the various virtues of CITs relative to mutual funds, but it is frank in its assessment of the potential “downsides” of CIT investing. In addition to the cost efficiency and fiduciary protections, share class structures inside CITs allow for trustees and asset managers to take into consideration the size of plans, as well as the size of an intermediary consultant or adviser.

While they are generally less expensive than mutual funds, the fees charged for CITs can vary according to the service provided and are based on the assets in trust.

“It is important to understand how fees are assessed,” the paper says. “Costs may include custodial fees, investment manager’s fees and transactional fees related to the investment platform or investment vehicle being used.”

The paper cites an example where an investor holds a stable value CIT.

“As an example, if you hold a stable value CIT, and the insurance company were to charge fees or pass along any potential costs to the CIT fund, that information would need to be disclosed in the participation agreement or offering circular,” the white paper warns. “The participation agreement is the contract you enter into for services performed by the CIT. It will provide the requisite disclosure of compensation, acknowledgment of fiduciary status under ERISA and description of termination terms.”

As the trio explains, this agreement also serves as an acknowledgement of the terms and conditions that may be placed on the investments, “so it should be carefully reviewed by you and your adviser, and the analysis documented.” Something else to consider, according to the paper, is that investing in CITs may be subject to certain terms and conditions, and may even restrict a plan’s ability to freely surrender its interests under certain market conditions.

“Therefore, your adviser should become familiar with the details contained in the participation agreement,” the paper recommends.

A Boon for Advisers?

The paper also includes an in-depth discussion of how the use and understanding of CITs can benefit an adviser’s business.

“Many plan sponsors do not know to ask about lower-cost investment vehicles,” the paper says. “By ensuring access to CITs, advisers can support plan sponsors and participants by maximizing every dollar the participant puts aside for retirement. … By employing CITs as part of the solution, advisers can use their buying power to streamline their work with clients and select a single manager for a strategy.”

Another benefit to advisers is that, with their built-in fee advantages, CITs can bring “relatively low-cost alpha to investors.” In other words, investors can use more tactical active investment management philosophies in CITs while still paying less in fees relative to actively managed mutual funds.

Advisers also should not overlook the potential to create their own white-labeled CIT products. CITs are attractive in this context because there is no need to distribute Sarbanes-Oxley blackout notices, which can impede the process of launching a mutual fund.

“Lawsuits have been brought forth that allege a plan fiduciary failed to fulfill its fiduciary obligations by not investigating lower-cost investment vehicle options, including CITs, when they were available,” the paper concludes. “Advisers can help plan sponsors avoid such allegations by conducting thorough due diligence on the types of investment vehicles that are potentially available to the plan and ensuring that the plan has documented why they chose a particular vehicle.”