In a recent survey of retirement plan sponsors and advisers, Manning & Napier found 60% of employers would consider offering a Collective Investment Trust or other alternative investment vehicle to a mutual fund if it has the same objective, but lower fees in order to reduce their litigation risk. This is significant because 49% of 401(k) plan sponsors with $100 million to $250 million in 401(k) plan assets were considering, or intending to make an investment vehicle change during the 2017 plan year, according to a recent report published by Cerulli Associates, a global research and consulting firm.
For the remaining 51% of plans, comparing investment vehicles might seem like a daunting undertaking. CITs are often misunderstood, and many sponsors don’t know where to begin when comparing mutual funds and CITs. Admittedly, it’s a technical topic, but it’s a topic that is increasingly important.
Here are three reasons why CITs should be on any plan sponsor’s radar:
1) There are often cost advantages to using CITs. In many ways, CITs look and feel like mutual funds. CITs are commingled funds typically traded daily through the NSCC, just like mutual funds. The biggest difference between the two vehicles is that CITs are designed exclusively for qualified employee benefit plans, like 401(k) and pension plans. Individuals outside of a retirement plan are not eligible to invest in CITs. Since CITs are not open to retail investors, they are not subject to the same costly regulatory requirements as mutual funds. This allows managers of CITs to pass the savings on to retirement plan participants. With recent fee litigation and the Department of Labor’s fiduciary rule creating additional awareness on fees and fiduciary responsibility, cost advantages alone make CITs worthy of a look.
2) CITs are increasingly accessible. In 2016, approximately 20% of 401(k) plan assets were in CITs, with that number expected to grow according to Cerulli. According to Manning & Napier’s survey, 60% of advisers anticipate more of their plans will offer CITs in the next five years. Part of that growth is the result of broader accessibility. CITs are increasingly available to plans of all sizes, and while some CITs have minimum requirements, many do not. That means that small plans (even plans with less than $10 million in assets) can take advantage of what CITs have to offer.
3) Participants usually benefit with CITs. Let’s say a fiduciary selects an investment strategy they determine is in the best interest of participants. The strategy is available in either a mutual fund or a CIT. Most often, the CIT is less expensive — sometimes significantly less — than the mutual fund counter-part. That’s benefit No.1. A second benefit is 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. Lastly, sponsors of CITs serve as ERISA fiduciaries to the plans invested therein, under similar requirements as the plan sponsors themselves, and must act solely in the best interest of plan participants and beneficiaries.
For these reasons, fiduciaries of all plan sizes should consider CITs as part of their overall investment due diligence process.
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