Savers interested in investing in collective investment trusts (CIT) as part of their 401(k) plans should make sure they fully understand what these investment vehicles are and how they work. While CITs in some ways are much like mutual funds and are often run by mutual fund companies, there are major differences.
Both are pooled into investment vehicles and follow a specific investment strategy. But while mutual funds are open to the public to invest in, CITs are designed to be part of a 401(k) plan or pension plan and can be custom designed to fit the needs of the plan.
An investment manager or mutual fund manager typically oversees the management of an actively managed CIT portfolio, whereas a passively managed CIT may track an index, much like indexed mutual funds. The assets within the portfolio can be made up of stocks, bonds, exchange traded funds, real estate, private equity and mutual funds. In fact, some CITs mimic publicly traded mutual funds and may use the same manager or strategy.
Not Regulated Like Mutual Funds
One major difference between CITs and mutual funds that investors and financial advisors should be aware of is that CITs are not subject to the Investment Company Act of 1940, which includes various regulations governing mutual funds, as well as extensive disclosure requirements.
CITs also do not have to be registered with the Securities and Exchange Commission as do mutual funds. And while mutual funds are actually managed by an investment company, CITs are commingled accounts offered through banks or trust companies. That means that the Office of the Comptroller of the Currency regulates them. Similar to mutual funds, however, the assets in a CIT are not insured by the Federal Deposit Insurance Corporation (FDIC).
CITs' administrative expenses are typically lower than those of mutual funds because they are not subject to the many regulations that mutual funds must abide by. CITs also do not have the added expense of marketing because they are not targeting individual investors, so this too helps to keep costs down. Lower costs are an added attraction for investors and give CITs an advantage over their higher costing mutual fund counterparts.
According to Morningstar, Inc. (MORN) data, the median expense ratio for large-blend mutual fund share classes is 1.06% and for institutional share classes, it's 0.75%. By contrast, the median expense ratio for a CIT large-blend share class is 0.60%. Many CITs also use index-based strategies, which cost far less than actively managed funds to run, giving them another advantage over mutual funds.
Interest in these investment vehicles continues to grow. At the end of 2012, there were 2,150 CIT share classes tracked by Morningstar. Today, Morningstar tracks 1,680 CITs made up of 3,300 share classes. Many of those CITs are, in fact, target-date funds, which are growing in popularity. Part of this growth can be attributed to the fact that in 2006 the Pension Protection Act made it possible for employers to offer CITs as default investment choices in their 401(k) retirement plans.
Lack of Transparency
Employees interested in investing in CITs should be aware that CITs are not subject to the same disclosure requirements as mutual funds. That means that there is less information available about them. So before investing in CITs, employees should find out if their retirement plan makes quarterly performance data available. More often than not, performance data on these funds is not more frequently available.
Information about CITs holdings is also often not made readily available to investors. And while some plans do provide daily price information about CITs on their web sites, many do not. This could present a problem for those investors looking to take a distribution or rebalance their portfolio.
One way to garner more information on a CIT is to look at a publicly traded mutual fund that has a similar portfolio and is run by the same manager or company as the CIT. By doing so, an investor can compare the mutual fund’s price and performance history to that of the CIT. One caveat investors should be aware of, however, is that the fees and various other differences between the CIT and mutual fund could result in differing performance results.
The stewardship of a CIT also differs from that of a mutual fund. Unlike mutual funds, CITs are not required to have boards of directors. However, under the Employee Retirement Income Security Act (ERISA), retirement plans are required to act as fiduciaries of these funds, looking after participant’s interests. Still, investors should make sure to read the summary plan description of a CIT, which describes how the fund works. CITs are required to make these documents available to investors.
Other pertinent information may also be made available by the various CITs, such as information about the fund's manager, fees charged, holdings, strategy and performance. If the CIT does not provide the information the plan administrator or the human resources department of the employer may provide it.
The Bottom Line
Employees looking to invest in a CIT offered by their company’s retirement plan should make sure to read up on any and all information being offered about the fund. They should also look to see if a qualified fund manager is running the fund and if and when performance data will be available for review.