Should Plan Sponsors Add CITs to Their Investment Menus?

With today’s greater scrutiny of both retirement plan fees and the decision-making processes of plan sponsors, many have decided to include a collective investment trust (CIT) as an investment option in their 401(k) plans.

For example, data from the Investment Company Institute shows that assets held in CITs by 401(k) plans with 100 participants or more increased from 6% in 2000 to 17% in 2015. In addition, data by Cerulli Associates shows that assets in CITs rose nearly 12% from the previous year to $2.8 trillion at year-end 2016. Cerulli notes that 49% of 401(k) plan sponsors with $100 million to $250 million in 401(k) plan assets were considering an investment vehicle change during the 2017 plan year.

Noting that CITs are often misunderstood and many sponsors do not know where to begin when comparing mutual funds and CITs, a blog post by Shelby George, Senior Vice President of Advisor Services of Manning & Napier, seeks to help eliminate some of the confusion by offering three reasons why plan sponsors should consider CITs.

1. Cost Advantages  

According to George, as a way to reduce their litigation risk, employers would consider offering a CIT or other investment alternative to a mutual fund if it has the same objective, but lower fees. In fact, she notes that a recent Manning & Napier survey of retirement plan sponsors and advisors found that 60% of employers would consider offering a CIT under such circumstances.

George explains that while CITs look and feel like mutual funds, the biggest difference is that CITs are designed exclusively for qualified plans. Thus, individuals outside of a retirement plan are not eligible to invest in them, and since CITs are not open to retail investors, they are not subject to the same regulatory requirements as mutual funds. In addition, she notes that managers of CITs can pass the savings on to plan participants.

George further contends that with recent fee litigation and the Department of Labor’s fiduciary rule focusing the spotlight on fees and fiduciary responsibility, “cost advantages alone make CITs worthy of a look.”

2. Accessibility

Broader accessibility is helping to lead the growth rate of CITs, according to George. She notes that a recent survey by her firm found that 60% of advisors anticipate that more of their plans will offer CITs in the next five years. George explains that CITs are increasingly available to plans of all sizes and that while some CITs have minimum requirements, many do not, meaning that smaller plans (even for those with less than $10 million in assets) can take advantage of CITs.

3. Participants Usually Benefit

George notes that when a fiduciary selects an investment strategy that they determine to be in the best interest of participants, but the strategy is available in either a mutual fund or a CIT, one advantage of the CIT is that most often, it is less expensive — sometimes significantly less so.

A second benefit is that CITs include only retirement plan assets, so all CIT investors share a long-term investment perspective, which is not often the case in other investment vehicles. Moreover, she emphasizes that sponsors of CITs serve as ERISA fiduciaries to the plans invested therein, under similar requirements as the plan sponsors, and must act solely in the best interest of plan participants and beneficiaries.

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