As explained by Gary Kleinschmidt, head of DCIO sales at Legg Mason, collective investment trusts are an increasingly popular investment vehicle available to institutional investors—namely defined contribution and defined benefit retirement plans.
He tells PLANADVISER there is relatively little user-facing difference between a mutual fund and a collective investment trust (CIT), especially from the ground-level perspective of the plan participant. Today the CIT structure is increasingly deployed in defined contribution plans with a target-date fund (TDF) overlay—often in an open-architecture approach giving plan sponsors a means of creating custom glide paths for their participant population at an affordable price.
“A CIT is created as an investment option for a plan through a standard trust contract signed by the plan sponsor and the trust company,” he explains. “Importantly, CITs are supervised by banking regulators, rather than the Securities and Exchange Commission (SEC) and other federal financial market oversight agencies. It’s not a difficult process compared with mutual funds—at this point, most or probably all recordkeepers are very familiar with the process and have the capability to bring this into a plan.”
One other important distinguishing factor is that CIT return results are not reported or tracked the same way as mutual funds, Kleinschmidt says, but this difference has diminished greatly with expanded use of digital reporting technology.
“The criticism often is that you can’t find a ticker symbol for a CIT in the newspaper—instead you have a CUSIP number that is harder to access,” he notes. “But with modern technology and the Internet and the exposure we have to live data, CITs have achieved the daily transmission and transparency that plan sponsors demand. Today you can get the same type of daily close for a CIT that you can get on a mutual fund.”
Kleinschmidt adds that most recordkeeping platforms “now have their own internal databases anyway for mutual funds—you log into your platform and get the information that way. So that pressure is going away and it’s also contributing to the tailwinds for CITs. It’s related to the greater attention that is being paid to exchange-traded funds (ETFs). That structure has benefitted from technology advances as well.”
Kleinschmidt’s explanation of the advantages of CITs continues: With a mutual fund there is a board of directors and everyone gets compensated on that board. In a trust vehicle this isn’t the case, and there are other expenses that are involved with mutual funds that do not factor into collective trusts.
“It’s a significant savings when you look across all the fees and expenses that you can cut out through a CIT structure, especially factored over the lifetime of a through-retirement TDF,” he concludes. “With the CIT conversation we talk a lot about fee compression, but it’s also about participant outcomes. The lower we can push the portfolio drag the better the participant outcomes will be.”
Tom Kelly, who runs national accounts for Legg Mason’s largest institutional clients, tells PLANADVISER much of his work in recent years has centered on CITs. For example, he helped to drive the creation, in partnership with Hand Benefits & Trust Company, of the Legg Mason 401(k) Roadmap Funds, a series of nine target-date collective investment funds (CIFs) designed to be successor funds to QS Legg Mason Target-Date Retirement Funds. The mutual fund series was closed on November 14, Kelly explains.
“The new CITs are able to utilize investment strategies and processes similar to those in shuttered funds, including similar asset-allocation glide paths and dynamic risk management,” he notes. “But under the CIT structure we have cut upwards of 20 basis points from the operating expenses of the funds.”
Kelly says plan sponsors should understand that CITs can be complicated, but they offer a lot of promise.
“In Legg Mason’s case, the Roadmap Funds are funds-of-funds and will invest in a combination of underlying funds representing a variety of broad asset classes such as equity, fixed-income and inflation-hedging strategies,” he says. “The Roadmap Funds’ glide path is designed to adjust over time to become more conservative by increasing allocations to fixed-income securities as investors near retirement and to effectively balance market risk against longevity risk.”
Kleinschmidt adds that Legg Mason favors a through-retirement approach to TDFs, for a number of reasons. First are the prevalence of longevity risk and the shortage of savings and investments among U.S. pre-retirees. These factors imply a need for greater equity exposure and growth potential, he says.
“Next, if I had a crystal ball, I would expect that if the fiduciary legislation from the Department of Labor has the impact a lot of people are predicting, one of the outcomes would be that the rules will be so strict for fiduciaries and rollover recommendations that people would naturally keep more money in their 401(k)s through retirement,” he says. “So, offering through-retirement funds can be a solution to that problem.”
He adds that this thinking “informs Legg Mason’s approach to building through glide paths.”
“We believed in through-funds before the DOL restarted its fiduciary effort, because we know the average participant, if they live to be 65, has a pretty good chance of living 20 years after that,” Kleinschmidt continues. “It’s a significant amount of time these people will have in retirement and there is some substantial longevity risk that people face.
“But we also know we need to protect them, so it’s a balancing act,” he concludes. “We know there is a demand for us to build levers into our funds to respond to the market volatility and try to prevent the major losses that we saw in earlier crises.” (See “Is Glide-Path Investing for Everyone?”).
Kelly’s and Kleinschmidt’s commentary comes as the Coalition of Collective Investment Trusts (CCIT), an advocacy organization founded in 2012, is sponsoring a first-ever “Collective Investment Trust Awareness Week” to promote education about and awareness of CITs as an investment vehicle increasingly used by retirement plans.
During CIT Awareness Week, the CCIT is providing a number of educational opportunities, including a release of an educational white paper about the 75-year evolution and increased demand for CITs. They’re also releasing a short introductory resource on CITs titled “Myths and Facts,” as well as a “Benefits of CITs” overview and two upcoming webinars (more info here).
“CITs have become an increasingly attractive option for retirement plan sponsors, who are more focused than ever on controlling plan fees and costs,” adds Kevin Lyman, general counsel of Invesco Trust Company and current Chairman of the CCIT. He notes that in 2014, a Callan Trends report about larger 401(k) plans noted 60% of defined contribution retirement plans offered CITs in their fund lineup, up from 52% in 2013.
He feels plan sponsors should be aware that CITs, frequently referred to as “pooled,” “collective” or “commingled” funds, are similar in many respects to mutual funds and offer a cost-effective, tax-exempt alternative for retirement plan sponsors seeking access to a broad range of investment strategies. “While in the past CITs were sometimes cumbersome for retirement plans to administer, today’s technology has enhanced reporting capabilities and enabled more seamless operation on recordkeeper platforms,” he concludes.