CITs, Mutual Funds Differ in Layers of Oversight

As the retirement industry continues to expand opportunities for participants to invest through collective investment trusts, participants and plan sponsors may benefit from understanding key differences between CITs and mutual funds—the investment vehicles CITs have surpassed as the preferred retirement plan investment offering.

Unlike mutual funds, CITs are regulated as bank products, not as securities, and are therefore not regulated by the Securities and Exchange Commission. Instead, CITs are regulated by state and federal banking regulators. Depending on the charter of the issuing bank, that can be either the federal Office of the Comptroller of the Currency or state bank examiners, along with the Internal Revenue Service. CITs also are subject to the Employee Retirement Income Security Act, rather than the Investment Company Act of 1940, under which mutual funds are governed. In addition, CITs are privately held and therefore cannot be purchased in the retail market, as mutual funds can.

Dan Pawlisch, a 403(b) client practice leader at Aon PLC, says there is no inherent benefit or drawback to having more layers of fiduciary oversight by investing via a CIT. He says the greater question is about trustee accountability and the process a plan sponsor has in place for governance.

While a mutual fund might have a “bundled” investment manager and a trustee, it is not uncommon for a CIT to have additional administrative layers of oversight, Pawlisch says. Luigi Andriani, head of products for Equitable’s group retirement business, suggests that the fiduciary layers of a CIT can include a CIT provider itself, an investment provider, an investment selection provider and a glide path provider.

“Good [plan] governance,” Pawlisch says, is simply understanding the different roles of oversight within a CIT, and documenting and monitoring each fiduciary’s responsibilities.

Annelle Kemp, a director in Alpha Financial Markets Consulting’s North America asset and wealth management practice, says the question of whether more oversight is “good or bad” is a question that depends more on the trustee selected to oversee the CIT—as each can have its own trustee “track record.”

In terms of oversight frequency, Pawlisch says it is common for sponsors to review each vehicle around the same time—typically once per quarter—since many plans offer investments through both CITs and mutual funds.

Kemp says that while mutual funds are publicly traded and required to have quarterly meetings, CITs are also required to be audited on an annual basis. However, CITs are required to issue audited financial statements and supply information on pro rata shares to be included on the plan’s Form 5500.

More important than meeting frequency, however, are the topics covered in the meeting, such as changes in investment performance or expenses, Pawlisch says. It is part of a sponsor’s ongoing duty to monitor investment selections.

“Often, [fiduciaries] don’t necessarily start with the [vehicle] they want as much as the investment,” Pawlisch says. From there, [fiduciaries] evaluate, “‘What are the expenses? What is the underlying [investment] philosophy?’ Once [a fiduciary has] conviction [in those elements], it determines how best to implement that strategy, through a mutual fund, or a CIT.”

When it comes to evaluating the fine details between the two vehicles, Pawlisch says plan sponsors can make participants aware that a CIT may have a shorter performance history than a mutual fund. Kemp says that knowing who the trustee of a fund is—including their “track record” within that role—can help make up for CITs having shorter performance histories on which to judge them.

When asked about any difference in investment transparency between the two vehicles, Pawlisch calls the issue one “more of nomenclature.” A “prospectus” is an SEC-required document that gives the public relevant information about the offering of a security—therefore it cannot govern a CIT. “Fund offering document” and “participation agreement” are the more common terms used for the documents that contain information about a CIT, he says.

Kemp says that while mutual fund prospectuses are publicly available, a plan sponsor or recordkeeper can request a CIT’s fund offering document, a declaration of trust—the legal document that establishes the trust—and other documents, once a participant is invested. Pawlisch says a recordkeeper will also typically make available to participants a fact sheet about the CIT.