The lower cost of collective investment trusts (CITs) is strongly attracting the attention of plan sponsors, retirement industry executives say.
Compared to mutual funds, CITs are generally priced 10 to 30 basis points lower, according to a DST white paper, “Collective Investment Trusts—A Perfect Storm.”
DST attributes this lower cost to three factors. First, as bank products, CITs are regulated at the state level by the Office of the Comptroller of the Currency instead of at the federal level by the Securities and Exchange Commission. Second, CITs are not permitted to advertise, and third, CITs do not have revenue sharing.
Backed by these benefits, between 2009 and 2016, CIT assets have grown by an average of 14.4% a year, compared to 9% for mutual funds. DST projects their assets will grow another 63% from $1.9 trillion in 2015 to $3.1 trillion by 2018.
Given the rash of lawsuits that have been filed against retirement plans in recent years, accusing the plans of not leveraging their buying power to get a good deal on fees, DST expects more plan sponsors will at least consider adding CITs to their fund lineup.
Whitfield Athey, chief executive officer of Delta Data in Columbus, Georgia, says that many CIT providers have been lowering their costs well beyond the 30 basis points that DST points to. “They are getting very aggressive” in this regard, with many lowering their costs to the “single digits, sometimes half as much as R6 share classes,” Athey says.
Cindy Dash, general manager at Matrix Financial Solutions, a Broadridge Company, in Denver, observes that in the past 12 to 18 months, she has seen more clients interested in CITs and has seen an increase in CIT assets under administration of more than 30%.
“In our opinion this increase is the result of the ‘conflict of interest’ rule, in which plans are looking for lower cost retirement plan options and the fact that once set up, CITs are operationally efficient,” she says.
As for the additional administrative workflow associated with CITs, Eric Garofalo, executive director at Morgan Stanley Wealth Management in New York, says that plan sponsors need to submit a participation agreement with the bank trust company managing the CIT.
While CITs have historically been a little more difficult to set up, investment firms such as Delta Data have created software portals that both the plan sponsor and the custody firm can use, Athey says, resulting in “easier coordination between the asset manager and the plan.”
While some plan sponsors may worry that CITs have a tracking error against their benchmarks, it is typically quite small and can sometimes be smaller than the tracking error found in a mutual fund, because CITs are design exclusively for retirement plans, says Jeffrey McConnell, chief investment officer at Graystone Consulting in Purchase, New York.
The only time that Athey has found tracking errors in CITs is when their values are manually calculated on spreadsheets.
As for his advice to plan sponsors and advisers when selecting a CIT, Athey recommends that they look for name brand providers and large trust companies that do a lot of business with retirement plans.
McConnell adds: “The due diligence process is the same as it is with any investment vehicle. Evaluate the team and the return history. Go through all the typical steps you would go through in any investment due diligence process.”