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By Karen M. Kroll
Although mutual funds still account for the majority of investments in retirement plans, CITs, or collective investment trusts (also known as collective trust funds), are muscling in on the territory. Of the overall $13.4 trillion retirement market in 2009, about $1.6 trillion was in CITs, says Steve Deutsch, director of CITs and separate accounts with Morningstar.
CITS are pooled investment vehicles that can invest in equities, fixed income, mutual funds, ETFs or some combination of these, according to First Mercantile Trust, a Memphis, Tenn.-based provider of corporate retirement plans. The trustee develops an initial unit value or unit of participation for each trust, which is similar to a share in a mutual fund. As the prices of the underlying securities fluctuate, so will the unit value of the CIT.
At first glance, CITs sound awfully similar to mutual funds. However, several differences come into play. CITs are offered only by banks or trust companies, and can only be used within qualified retirement plans for which the trustee serves in a fiduciary capacity. "They are exclusively for ERISA money," says Ed Riley, chief investment officer with First Mercantile.
Because CITS are not available to retail investors, their return streams differ from mutual funds, says Don Stone, president and co-founder of Plan Sponsor Advisors in Chicago. Although not automatically a positive or negative, it does mean "the investment experience can be different than with a mutual fund," Stone notes.
What's more, collective investment trusts are subject to banking regulations, rather than the Investment Company Act of 1940, which covers mutual funds. Among other things, this means CITs don't have to provide some of the documents, such as prospectuses, that mutual funds do. While that helps keep costs down, some investors prefer the disclosure that comes with a prospectus. However, most CITs provide an investment policy statement, which details the risk and return expectations of each investment, Riley says.
Over the past several years, CITs have gained popularity. For instance, Riley says his firm is seeing growing demand, particularly among plans of $1 million to $30 million in assets.
CITs' generally lower costs are a big reason. However, experts say it' difficult to determine how much less less expensive than mutual funds CITs really are. In part, that's because providers of CITs, unlike providers of mutual funds, are allowed to negotiate their fees with individual plan sponsors, and do so, Stone notes. Pricing "is a business decision, not a regulatory one." That suggests that bigger plan sponsors can get better deals.
Also driving interest in CITs is the Pension Protection Act of 2006, which "signaled that these are an acceptable investment option for retirement plans," Deutsch says.
Yet the cost differences between of CITs over mutual funds may begin to dwindle, if, as is possible, regulatory differences do as well. In a recent speech, Andrew Donohue, director of the Division of Investment Management with the SEC, indicated that his division was investigating whether CITs' exemption from registration under the Investment Company Act "denies investors appropriate protections."
While political jockeying probably is behind some of the SEC's moves, the agency also is legitimately concerned, says Stone. "A lot of dollars are flowing into these and (investors) need adequate information." Most likely the two types of investments will remain under different regulators, but the regulations themselves will become more standardized, he says. That's already occurring, he adds, in the move toward greater disclosure on the part of CITs providers. That naturally will put upward pressure on CIT pricing.
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