Research from Cerulli Associates finds that qualified retirement plans and other institutional investors remain enthusiastic about leveraging collective investment trusts (CITs)—resulting in strong growth and innovation in the space.
Cerulli data shows CITs have collected more than $2.5 trillion as of year-end 2015. According to Chris Mason, senior analyst at Cerulli, a lot of the momentum is due to the fact that CITs have become an increasingly popular vehicle for institutional investors in both the defined benefit (DB) and defined contribution (DC) marketplaces.
“These vehicles serve as a viable alternative and potentially more cost-effective options for institutional investors to accomplish their investment goals [compared with mutual funds],” he explains, noting that Cerulli believes plan sponsors, consultants, and recordkeepers are “now more familiar with some of the basic operational attributes of CITs than in years past.”
The Cerulli research warns, however, that CITs have a variety of unique characteristics that often can be misunderstood, leading many CIT managers to focus on efforts to increase awareness and education of the vehicle.
“Likely the biggest differentiator from mutual funds and exchange-traded funds is that CITs can only be used in qualified retirement plans—i.e., DB plans, and increasingly, 401(k) DC plans,” the research explains. This restriction means that data availability on third-party platforms can be an issue, making benchmarking potentially a tougher task.
Cerulli advocates for increased education efforts for end-investors that explains how CITs are investment vehicles in which assets from multiple plans can be commingled into one trust. Each CIT is managed professionally on behalf of those plans (or a single large plan in some cases) and not open to the public. For that reason, they’re only available as an investment option within employer-sponsored plans that have negotiated an agreement with the CIT provider. They can also be very nimbly tailored to serve the needs of the specific plan population buying/creating the CIT.
NEXT: Defining characteristics of CITs
Another defining characteristic of CITs is that they are regulated more as a banking product than an investment fund. The products fall under the oversight of state banking regulators and the federal Office of the Comptroller of the Currency (OCC), rather than the Securities and Exchange Commission (SEC). The OCC regulators are rigorous in their examinations of trust companies and CITs, of course, but providers in the space are advantaged in that the OCC generally requires less documentation and pre-approval compared with the SEC. The relative ease of reporting and compliance is where a lot of the potential cost savings associated with CITs comes from in the first place, but it's no free lunch.
“Many who work with CITs cite a variety of issues regarding the third-party data available on these funds,” Mason says. “Since the data is self-reported and not mandatory, some firms choose not to report certain elements of their CITs. This lack of mandatory and homogeneous reporting creates difficulties for analysts seeking a comprehensive picture of the market.”
Cerulli concludes the appeal of CITs for plan sponsors and fiduciaries is generally a lower expense profile and an improved ability, especially for larger trusts, to create unique investment funds that address the needs of real plan participants in a more refined way then retail target-date funds, for example. This can be accomplished because the sponsors can work directly with fund managers to discuss and meet the investing needs of their participants, factoring real-world demographic data into portfolio design decisions. Mutual funds, on the other hand, tend to make portfolio decisions based on much wider demographic considerations.
These findings and others are featured in Cerulli's fourth quarter 2016 issue of The Cerulli Edge – U.S. Institutional Edition. Information on obtaining Cerulli research is available here.