The use of collective investment
trusts in defined contribution plans is growing at a dramatic clip, encouraged
by two factors: A heightened, ongoing regulatory focus on plan fees and vast
improvements in the investment vehicle's features over the past five to 10
Strengthened by their lower fees,
greater flexibility in investment management and less complexity in plan
management, CIT usage overall reached $1.58 trillion in assets at year-end
2015, compared with $895.6 billion in 2008, according to Pensions &
The recent overhaul of the New
York State Deferred Compensation Plan's investment lineup shows the rising
value of CITs to help cut costs and reduce asset allocation overlap. After an
intensive request for proposal process, the board of the nation's largest
deferred compensation plan voted to replace some of the plan's mutual funds
with less expensive CITs and add a few CITs; something we believe would not
have been considered during the last plan review in 2008.
CITs — also known as commingled
funds, collective investment funds or collective trust funds — have been around
for more than 75 years. However, dramatically improved features over the past
few years — including record-keeper acceptance, consultant familiarity, pricing
flexibility, daily valuation, NSCC Fund/SERV compatibility and improved
reporting and transparency — have helped fuel their adoption, especially in DC
plans. Plan sponsors also appreciate that CIT trustees are subject to ERISA
fiduciary standards with respect to ERISA plan assets invested in the vehicles.
As investment expense is
generally the largest single cost associated with a retirement plan, lower-cost
vehicles, including CITs, provide plan sponsors and participants the potential
for considerable savings as the industry becomes more focused on reducing costs
to enhance performance and avoid fee litigation. The potential pricing
flexibility and cost advantages that CITs offer when compared with other
investment vehicles are translating into a rising demand in the DC market:
- Of the 100 largest corporate DC funds in 2016, CITs
were used by 54.3%, more than mutual funds, separate accounts and ETFs
combined, according to Pensions & Investments.
- 71% of DC plans offered at least one CIT in 2015, up
from 60% in 2014 and 52% in 2013, as evidenced in Callan Associates'
Lower costs or fee advantages are
a clear benefit of CITs over mutual funds.
In comparison to mutual funds, CITs
typically have lower administration, marketing and distribution costs. As CITs
are not subject to oversight from the Securities and Exchange Commission, they
do not incur some of
the expenses associated with compliance and regulatory
reporting. There is no need to support the marketing and distribution of the
fund into the retail space (e.g., producing prospectuses and maintaining retail
call centers). Participant record keeping generally is at the plan level, rather
than the CIT level, which can allow greater flexibility on record-keeping
structure and costs. This can all result in both lower initial and ongoing
operational costs. As such, CIT median fees can be 20 to 25 basis points less
than mutual fund fees, as shown in the chart below:
CITs can include any of the
investment assets that are in mutual funds, they can be actively or passively
managed, they can be index funds, funds of funds, or non-traditional funds such
as real estate investment trusts. CITs are particularly useful in
single-manager or multimanager funds of funds, such as asset allocation (target
risk or balanced) and target-date funds. These investments are growing in
popularity due to their designation as qualified default investment
alternatives under the Pension Protection Act. Today, the CIT structure is
increasingly deployed in target-date funds — often in an open-architecture
approach giving plan sponsors a means of creating custom glidepaths for their
participant population at an affordable price.
Plan sponsors (working with the
plan's consultant and ERISA attorney) should consider the following questions
to determine whether moving to CITs within the plan's investment lineup would
benefit the plan and participants:
- Is the plan provider's current investment universe
- Is the cost structure appropriate given the plan
size, the services provided and the scope of desired investment options?
- Is there an opportunity to customize fees based on
- Would the plan benefit by switching some asset
categories to CITs due to cost- or fee-adjusted performance?
- What type of data and/or reporting will be supplied
to the plan?
- What communications, education and information will
be supplied to plan participants? In what format?
- Are there any liquidity boundaries, trading issues or
- How experienced is the asset manager, and what is the
firm's reputation in the marketplace?
- Given all available information, is the investment
vehicle the best fit for the plan participants and their beneficiaries?
here for the original article from Pension & Investments.