CITs in 401(k) Plans

According to a recent Wall Street Journal article (subscription required), collective investment trusts, or CITs, are becoming more popular with large and mid-size DC plans willing to trade transparency for lower fees.

CIT prices in the over-$1 billion DC market can be half of the cost of a retail fund, according to Callan, but that cost benefit has rarely translated to plans in the under-$100 million DC market — although that may be changing.

CITs now command 16% of assets in DC and pension plans, up from 12.7% in 2009, according to Cerulli. Though many CITs focus on passive strategies, active managers like Fidelity are using CITs to lower costs by as much as 20 to 30 bps. Traditionally less transparent, CITs, which are overseen by bank regulators, not the SEC, have lower regulatory costs and are starting to provide increased disclosure to DC plan sponsors. Though ’40 Act funds provide prospectuses, the reality is that few participants read or understand them anyway, and, like the plan sponsors who are making CITs available, most would probably trade transparency for fees — especially if those plan fiduciaries and their advisors are overseeing them.

On the other hand, the smaller plan market has not embraced CITs as much because the cost efficiencies are not as obvious as they are for larger plans. Elite advisors, including GRP, NFP, Pensionmark, Centurion and Sheridan Road, are creating CITs for their clients, creating buying power which they can make available to clients who otherwise not be able to access them. And CITs are not just being used for professionally managed investments like target-date funds; some groups are looking at multi-manager strategies, mixing active and passive strategies that are less than half the price of better known but higher priced ’40 Act funds.

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