A recent Reuters article says that assets in collective investment trusts, or CITs, are “surging” as asset managers are using them to “slash” fees, especially in DC plans.
The article suggests that this may be a reaction by active managers in response to lower-cost index funds, as well as the so-called excessive fee lawsuits, such as Tibble v. Edison. The article notes that with the Delta Airlines plan, Fidelity was able to cut fees by 23% for its Contrafund inside the airline’s DC plan. The $2 trillion flow into CITs that was expected to occur by 2014 has been easily surpassed, according to Reuters. Meanwhile, Callan estimates that 60% of all plans used a CIT in 2014, up from 52% in the previous year.
But let’s dive deeper into the value of CITs. While they are potentially cheaper than their mutual fund counterparts, the Reuters article notes that they are more opaque, with oversight provided by various state and other federal agencies rather than the SEC, which is set up to review investment products. CITs aren’t required to have a prospectus, and there are very limited ratings by third parties like Morningstar.
Not mentioned in the article: Do CITs make sense for smaller DC plans, and does Callan’s 60% estimate include only very large plans? For plans under $100 million, savings from CITs may be muted, especially with so many assets going into target-date funds (see also “Mutual Funds Trump CITs”).
