Collective Investment Trusts: The Basics

As the number of collective investment trusts (CITs) continue to grow, there are still many investment advisors and retirement plan trustees that are unfamiliar with these investment vehicles.

A CIT is basically a pooled investment vehicle organized as a trust, which is administered by a bank or trust company. CITs are authorized under 12 CFR 9.18(a)2 in the Code of Federal Regulations and defined as a fund consisting solely of assets of retirement, pension, profit sharing, stock bonus or other trusts that are exempt from federal income tax.

Once a vehicle designed solely for defined benefit plans, CITs are now also widely utilized by defined contribution plans and governmental retirement plans qualified under IRC Sec. 457(b) as well. Currently, IRC Sec. 403(b) retirement plans, individual retirement accounts (IRAs), IRC Sec. 457(f) government plans, private foundations and endowments are prohibited from investing in CITs.¹ There is, however, a bipartisan bill pending in Congress that would make it possible for 403(b) plans to invest in CITs.

Key Features of a CIT:

• Only accepts investments from qualified retirement plans such as 401(k) plans, defined benefit plans, profit sharing plans, etc.;
• The governing document of the CIT is the Declaration of Trust, which provides the legal framework of the CIT, including but not limited to, investor eligibility, redemptions, and terms of valuation;
• CITs are not registered with the SEC. CITs are regulated by the Office of Comptroller of Currency (OCC) or state banking authorities, depending on whether the sponsor is a national or a state bank;
• CITs must comply with the rules of the Employee Retirement Income Security Act of 1974 (ERISA) and oversight by the Department of Labor (DOL). The CIT’s trustee and any sub-advisor would be a fiduciary of the assets invested in an CIT;
• CITs are required to issue annual audited financial statements;
• CITs are valued daily as communicated through the sponsor’s website, and have daily liquidity;
• CITs can have multiple share classes; and
• CITs are not FDIC insured.

Although CITs share many similarities with mutual funds, a few strategic differences stand out:

• A CIT does not need to register under the Investment Company Act of 1940 and therefore does not adhere to the SEC regulations and reporting that a mutual fund does, so it will generally have lower overhead costs. Since CITs can only accept investments from certain qualified retirement plans, their marketing and distribution costs will also be lower than those of a mutual fund, which markets to the entire retail market.
• Mutual funds are required to charge the same management fee amongst all share classes while a CIT may offer different share classes with varying management fees, typically based upon the amounts of assets contributed. This fee savings could be significant for larger plans, who can negotiate significantly lower fees.
• Since CITs cannot elect to be regulated investment companies (RICs) for tax purposes like most mutual funds, there is no requirement to distribute 90% of its taxable income to investors on an annual basis. This allows the CIT to keep the funds invested in the trust.
• Because CIT investors consist exclusively of qualified retirement plans, there are typically less redemptions than a mutual fund, whose investor base is more diverse. This should lead to a more stable portfolio and better overall performance.
• Mutual funds offer greater transparency to investors due to the public reporting and disclosures required. However, many CITs publish quarterly fact sheets on the fund’s performance, top ten holdings, etc., to provide information on the fund; and most CITs will post daily information on the fund through the sponsor’s website. In addition, hundreds of CITs have now obtained CUSIPs and are tracked by rating agencies like Morningstar. The NASDAQ Fund Network (NFN) has registered over 650 CITs, whereby each CIT receives a unique symbol for each share class. Additionally the NFN distributes performance data of the registered CITs daily to investors.²

Investment advisors may consider forming CITs to add to their complex of fund offerings as they are attractive investment vehicles for qualified retirement plans based on the factors described above. It would also behoove trustees of retirement plans which qualify to invest in CITs to explore investing in a CIT due to the potential cost savings compared with the expense ratios of other vehicles with similar investment strategies.

¹The Coalition of Collective Investment Trusts
²SEI white paper: Collective Investment Trusts (CITs) Offer High Potential for RIAs and Plan Sponsors