CITS--Collective Investment Trusts--Gaining Traction in DC Plans: Retirement Plan Advisor, February 2010

Pooled vehicles may offer a cheaper option than mutual funds

Collective Investment Trusts (CITs)--unregistered, tax-exempt pooled investment vehicles maintained by a bank or trust company exclusively for qualified retirement plans--have always been a part of the defined benefit space, but they were not a very important part of the defined contribution (DC) world for many years. That's changing. Mutual funds, registered with the Securities and Exchange Commission (SEC) and valued on a daily basis, have been a key component in DC plans, but in the post Pension Protection Act (PPA) era, plan sponsors have had to become more focused on both costs and fiduciary matters, and because it is a cheaper option than a mutual fund, the CIT is gaining traction as the investing vehicle of choice.

"Plan sponsors and employers have had to get more sophisticated around employee benefits and they have had to recognize their fiduciary responsibilities and what the fees and expenses are," says Ian Sheridan, president and CEO of First Mercantile Trust, an organization that he says has always stayed true to CITs. "Because CITs are not offered outside of qualified plans, they don't have to bear the expenses of retail mutual funds. Nor do they have to bear the marketing costs associated with mutual funds."

Although First Mercantile did come out with a suite of mutual funds over the past few years, the company never gave up on CITs and has continued to bring this offering to DC plans that hold between $2 million and $30 million. Now, larger plans are showing a great interest in CITs, too, Sheridan says. Late last year, equipment manufacturing giant Caterpillar agreed as part of a court settlement to use CITs within its retirement plan to lower its plan expenses, a clear example that "the two worlds, big and small, should meet up again soon," Sheridan says.

CITs are becoming a viable option for 401(k) plans, both large and small, agrees Jake Hartnett, an analyst at Cerulli Associates, a Boston-based firm that tracks advisor trends. "We think there is a lot of interest out there, and while the market is currently dominated by a few large firms that have had this business for a long time, more legacy mutual fund companies are saying that to compete, they do need to launch CITs as another business line," Hartnett says. According to Cerulli, the CIT market currently stands at around $1.4 trillion.

Besides their lower cost and the fee transparency they offer, CITs are also popular with plan sponsors because the bank or trust company offering the product has fiduciary oversight of its managers and has to be constantly responsible for what they do. Poor managers and those that do not stick to the CIT's mandate can be replaced by the trust company, and this has greatly helped in the marketing of CITs, Hartnett says.

Conversely, because they are not SEC-registered products, it isn't possible to roll CIT shares into either new 401(k) plans or IRAs. CIT prices can't be found in newspapers or on the Web and it's hard for investors to get information about them, Hartnett says. So there is a lot of ground that needs to be covered in terms of both plan sponsor and plan participant education, so both can fully understand these products, he says.

This is where independent financial advisors can help, Sheridan says. "The registered investment advisor (RIA) channel has always had a more independent view of the world and could sustain the CIT through the period of mutual fund growth," he says. "There has also been a huge growth in the RIA world and the CIT has become a complementary product that can empower independent advisors more."

There's little doubt that the interest in CITs for DC plans is growing, Hartnett says, and the growth itself will lead to more widespread knowledge and greater understanding of these products, both by advisors and plan sponsors.

Ed Riley, First Mercantile's chief investment officer who heads up the CIT manager oversight efforts, also believes that CITs offer greater potential for development and innovation than mutual funds. Multi-managed solutions are one example of how these products can evolve, he says, and CIT providers also have the ability to customize CITs for individual plan sponsors that have a specific need or want to invest in a particular asset class.

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