Once primarily associated with passively managed investment strategies, interest in collective investment trusts, or CITs, is said to be increasing – but have we reached an adoption tipping point for CITs?
Well, according to respondents to this week’s NAPA Net reader poll… it’s not altogether clear.
Sure, just over one in four (21%) said we had. Although slightly more (23%) said we hadn’t. But even more (29%) said “maybe.”
Oh, and the rest split between “don’t know” and “depends on what you mean by tipping point.”
One reader explained it this way: “I think Jumbo plan market/plan sponsors have already tipped into acceptance of CITs, and that is rolling downhill to relatively smaller plans, at least for advisors who focus there and need to keep clients apprised of trends. As for actual adoption of CITs to plans, we have seen no interest, because of inherent mistrust of pricing transparency. The fact that fund manager is a legal fiduciary means nothing, if they can't find easy third party reference for the funds’ pricing.”
CIT ‘State’
Sure enough, among this week’s reader poll respondents, CITs really haven’t made much inroads; a third (34%) said that fewer than 10% of the plans they work with use CITs, and another 18% said “none” did. Stable value CITs were cited as an exception to the norm here, of course. But asked to list the percentage of current plans that used CITs, readers responded:
11% - less than half, but more than a quarter
13% - about a quarter
15% - fewer than 25%
9% - only about 10%
As for prospective clients, asked how many of their current proposals included the use of CITs, NAPA Net readers said:
29% - fewer than 10%
22% - none
14% - fewer than 25%
12% - about ¾ of them
11% - somewhere between half and three-quarters
8% - about a quarter
4% - all of them
For a clear plurality of readers (43%) that was “about the same” as a year ago, while another third (32%) said it had “increased some.” For the remaining quarter, it had increased a lot. None said it had decreased.
Fee Focus
Now, among the reasons typically cited for the expansion of CITs are; a greater interest in customized solutions, and perhaps the recent wave of excessive fee litigation targeting the use of more expensive alternatives. Asked to share their perspective(s), a significant number of NAPA Net readers (64%) said it was a “focus on fees,” followed (distantly) by:
11% - greater awareness and visibility of CITs
7% - concerns about litigation
6% - greater availability of CITs
4% - stronger promotion of CITs as an option
One reader noted, “There is stronger promotion, and thus greater awareness and in turn greater availability. First to get message is the advisor and to some extent plan sponsors, who in turn want more information from their advisors. Key here, from what we have seen, is that there is interest, but no purchase.”
Other reader comments:
“Custom CITs are now being offered at the advisory firm/ partner group level and are available to their clients at all plan sizes. Because advisors can bring this value add to clients, it will lead to a large uptick in promotion/ distribution of CITs. Combine this with the plan sponsor's focus on fees and we predict there will be a tremendous increase in their usage.”
“It's still a burden to explain to smaller plan sponsors along with the lengthy paperwork.”
“We are interested in CITs but for client's not currently on a zero revenue sharing arrangement, we have found the addition of CITs increases the overall plan cost.”
“We look at CITs for our large plans and we have yet to find any value to plan sizes below $500 million. Many times revenue sharing within mutual funds makes mutual funds more attractive than CITs. The minimums of CITs makes them not useful for the majority of 401k plans. Also, advisors fail to address the tracking error between CITs and their mutual fund counterparts. We have commonly seen CITs that technically had a lower expense but performed significantly worse MF counterparts. Finally, plan sponsors give up transparency when moving to CITs, and having a mixture of CITs and MFs in investment options could create participant confusion. I think CITs may gain in popularity over time, but as for right now they are just feasible in billion dollar retirement plans. All in all, I do think plan sponsors should consider them, but mainly just for due diligence purposes.”
“Catch 22 with home offices who push CITs as well because there is always some money back to the firm. While these may be "best" priced indexes etc. in competition with mutual fund options, there is a potential perception of bias, which as a 3(21) you want to avoid.”
“We use CITs when appropriate and the fees are lower than other vehicles. Recently the passive mutual funds have reduced their fees to the point that CITs are not less expense. CITs that we use typically involve actively managed asset allocation funds.”
“Utilization of CITs have trade-offs and right now with the lack of transparency on a day to day view, it is tough for us to see the use until the full trickle-down effect from mega/large plans starts to hit small/macro plans.”
“Our portfolios are mostly index funds. My personal opinion is that I don’t like that a participant can’t go onto CNBC.com and pull up their investment. I feel participants can relate more with funds.”
“We spend a lot of time analyzing CITs. A lot of advisors use CITs because of lower fees and assume that the XYZ collective trust is identical to the XYZ mutual fund with the exception of fees. It may be the same as far as manager and philosophy but because of cash flow, implementation date of CIT, etc. the returns can actually be lower and tracking error relatively high because of cash flows and relatively low amount in the CIT. Even if you look at index funds, some of the CITs are less expensive yet underperform the Vanguard 500 index net of fees. Often times, unless you have a very large plan, you can't access the CITs with enough $ that cash flow does not impact performance and/or fees are lower.”
“The minimums for certain share classes of CITs continue to drop and now many plan sponsors can leverage low cost CITs with no plan/mandate minimum.”
Or – as one reader noted, “I would like to learn more.”
Speaking of which – we have a panel at the NAPA 401(k) SUMMIT on this very topic! If you haven’t registered yet – what are you waiting for??!! Do so today at http://napasummit.org.
p.s.: don’t forget to register for the NAPA 401(k) SUMMIT. Nashville, Tennessee, April 15-17.
