Converge, Volume 13: Breaking Down CITs

Answering the Most Frequently Asked CIT Questions

March 08, 2017 | Retirement Plans

Shelby George

Senior Vice President, Advisor Services

Recent notable court cases which talk about at least considering Collective Investment Trust Funds (CITs) include Ameriprise Financial and Lockheed Martin – both with settlement agreements stipulating that plan sponsors consider using CITs in the plan. CITs are often less expensive to create/maintain and may be more flexible than their mutual fund counterparts given that they are subject to a different regulatory framework. While this may be a benefit to their fee structure, it can also be challenging because CITs are not broadly understood and often suffer misconceptions when compared to mutual funds. Below are the most common misconceptions and frequently asked questions by fiduciaries.

What is a CIT?

CITs are pools of securities, which are sponsored by a bank or trust company, and are designed exclusively for qualified employee benefit plans like 401(k) and pension plans. They look and feel like mutual funds, but haven’t historically been as broadly available—especially for small and mid-sized 401(k) plans. As the retirement plan industry evolves, so does the structure of a plan’s investment menu, including CITs.

Are CITs new?

CITs were first launched in 1927 and were a popular choice among defined benefit plans for decades. When 401(k) plans were developed in the 1980s, CITs were an option in many of the early plans; however, given the operational constraints of CITs and their lack of widely available information, mutual funds soon became the preferred vehicle in most 401(k) plans.

That said, CITs have undergone significant developments over the years, making them comparable to their mutual fund counterparts, while also offering distinct advantages.

Is CIT data broadly available?

Early CITs were traded manually and typically valued only once per calendar quarter. Furthermore, since early CITs were unique to each bank and portfolio manager, information was generally not publicly available.

Fast forward to their current form, CITs, like mutual funds, are typically traded and valued daily. Additionally, reporting has vastly improved over the years, allowing for further analysis when conducting manager due diligence. Specifically, data is generally reported on a regular basis to databases such as Morningstar, Inc. or eVestment Alliance and may be accessible through provider websites. While access to CIT data has greatly improved, it is important to note that the level of data available may vary depending on the provider.

Are CITs regulated?

A common misconception regarding CITs is that they are not regulated. While CITs are not regulated by the Securities Exchange Commission (SEC) like mutual funds, they are regulated by the Office of the Comptroller of the Currency (OCC), which is part of the U.S. Treasury; If at a nationally chartered bank or trust company or at a state chartered institution, CITs are regulated by their respective state authorities. In addition, CITs may also be subject to oversight by the Federal Reserve Board, Federal Deposit Insurance Corporation, Internal Revenue Service (IRS), and the DOL.

As CITs are not regulated by the same federal securities laws as mutual funds, they do not have the additional compliance costs associated with SEC required disclosures and filings. Without these additional costs, CITs can potentially provide considerable savings that can be passed on to plan fiduciaries and participants.

Why are CITs getting so much press recently?

The retirement industry has evolved over the years, and as such, so has investment menu construction. In addition to determining which types of investment strategies are to be used, plan fiduciaries are also tasked with determining which type of investment vehicle is most appropriate for their plan and the cost structure to be used.

With recent fee litigation and the DOL’s Fiduciary Rule creating additional awareness on fees and fiduciary responsibility, it is not surprising that CITs are again gaining attention. As previously mentioned, CITs can potentially provide considerable savings compared to their mutual fund counterparts. From a fiduciary perspective, unlike mutual fund managers, CIT trustees are considered fiduciaries under the Employee Retirement Income Security Act (ERISA) and are held to ERISA fiduciary standards. That said, CIT trustees must act solely in the best interest of the plan participants and beneficiaries, potentially making them more alluring in light of today’s legal environment.

To learn more about the advantages of using CITs, visit www.manning-napier.com/CIT.

The information in this paper is not intended as legal or tax advice.

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