Managing Today's Plans

Building a ‘Custom Made’ Retirement Plan

Understanding Collective Investment Trusts and why they can benefit your clients

by Ken Waineo

Mr. Waineo is the investment product and sales director for retirement plans at Standard
Retirement Services, Inc. (The Standard). Visit www.standard.com

Collective Investment Trusts, or CITs, have been in use since 1927 and have grown in popularity since about 2010. This is due in part to offering lower-cost investments compared to mutual funds. It has been well-documented that CITs continue on a steady growth trajectory due to their numerous advantages and growing popularity with 401(k) plan sponsors.

According to a report by Cerulli Associates in 2019, there is a learning curve associated with the contracting and implementation of CITs. Advisors interested in the potential of CITs for their clients’ retirement portfolios will need to understand them, how they work and whether they are the right fit.

First, what are they? CITs are tax-exempt, pooled investment vehicles maintained by a bank or trust company and offer similar benefits to mutual funds but at lower costs. The pooled funds are grouped into a master trust account that is controlled by a bank or trust company. Hence the name – Collective Investment Trust or CIT.

Here are CIT benefits to consider when helping plan sponsors build their retirement plan investment lineups:

1. CITs are a cost-effective way for advisors to create customized investment solutions

CITs offer advisors the opportunity to customize at the investment level and allow for portfolios to be rebalanced frequently. CITs can be built specifically to a plan or plans and at a lower cost than a mutual fund since they do not have the same redemption process.

2. CITs provide access to alternative investment strategies

CITs have more investment flexibility than mutual funds and can structure risk and investment management to meet the plan’s unique goals. For example, CITs can invest in stable value investments that offer a historically higher yield than money market funds. They also have more leeway to invest in alternatives like treasury inflation-protected securities (TIPS), real estate, commodities, high-yield bonds and hedge funds. Through CITs, small and medium plans can access non traditional investment strategies that may not have otherwise been available.

CITs can invest in stable value investments that offer a historically higher yield than money market funds. They also have more leeway to invest in alternatives...

3. CITs offer lower-cost, high-quality investment solutions for even the smallest retirement plans

When it comes to building a portfolio to last up to and through retirement, it’s important to offer cost-sensitive options to clients. Fees associated with CITs are generally less costly compared to mutual funds, with institutional-level pricing for smaller plans. CITs are able to be more cost-effective due to lower regulatory costs 1 and overhead expenses, while still being overseen by both the DOL (ERISA) and state banking regulators.

4. CITs mitigate fiduciary liability

The CIT investment manager is considered an ERISA 3(38) for purposes of selecting and monitoring underlying investments. Today’s advisors must understand CITs and their track record of growth that is outpacing mutual funds and numerous other benefits. To take advantage of their continued growth in the defined contribution (DC) market, advisors should take a close look at CITs as a complement to any client’s retirement plans when building out a diverse set of investment vehicles and products.

 

 

 

Articles and Resources
CITs approaching half of target-date assets – InvestmentNews
Why employers should consider the fastest-growing 401K plans as an investment vehicle – Buffalo Business Journal
Education among advisers needed for CITs – PlanAdviser
Transparency seen as essential for wider adoption of CITs – NAPA Demystifying marketing restrictions for CITs – NASDAQ
The CIT Opportunity – SEIC

 

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