Even with the Labor Department’s fiduciary rule concerning retirement plans vacated by the 5th Circuit Court decision on March 15, there is a clear direction toward holding the asset management industry responsible for delivering retirement solutions at low prices for investors.
Consumers like this trend, increasingly rewarding low-cost providers with their money, so margins are likely to stay under pressure. Thankfully, innovation has delivered a potential answer: Collective Investment Trusts (CITs). Many blend the performance potential of active management with lower-cost passive solutions.
CITs offer similar potential benefits to mutual funds at generally lower costs, providing attractive options for retirement plan sponsors in carrying out their fiduciary responsibilities. Available only to ERISA plans and certain other governmental plan types, and historically designed for large defined benefit plans, CITs have evolved into a popular choice for defined contribution plan sponsors of all sizes.
These solutions can provide participants with upside return potential, combined with the ability to manage volatility at times when investors may need it most. Using cost-effective investment vehicles such as CITs, rather than ’40 Act funds, can mean sizable savings for plans and participants.
Improved technology makes it possible to create individual investor accounts for five basis points or less. Thus, they can meet goals set by regulators to provide low-cost retirement solutions. CITs can also offer multiple classes of unit ownership, with different pricing to retirement plans depending on the amount of assets the plans invest. It should be noted, however, that CITs are not registered with the Securities and Exchange Commission, so manager selection is critical.
Transparency is generally high with CITs: Most are valued and traded on a daily basis, with portfolio values accessible online. Full statements are required to be issued quarterly.
On the downside, most CITs are new enough that they do no have long track records, compared to mutual funds, and have attracted little coverage from analysts. That can be addressed by choosing CITs managed by proven mutual fund managers with long track records of success, optimistic that they will continue to deliver for investors in a more innovative wrapper.
CITs can be ideal for plan sponsors targeting to smaller and medium-size companies who want to outsource their retirement plans. The company engages an investment manager, who manages a CIT that combines assets from eligible retirement plan investors into a single investment pool with a specific investment strategy. These assets may be managed by multiple managers, subadvisors chosen for specialized expertise. In fact, most CITs are built on a multi-manager architecture with access to complementary investment styles.
Subject to some exceptions, investment managers need not be concerned with the tax consequences of a CIT’s trading activities, because CITs (through the ERISA structure) are tax-deferred.
CITs may invest in the same types of instruments and securities as mutual funds, subject to their stated mandates and requirements and limitations in the governing documents. They can invest in multiple types of assets — stocks, bonds, actively and passively managed funds and ETFs, REITs, derivatives, etc. — often as a family of CITs that offers different investment strategies and styles.
CITs can be offered within target-date funds, which can be designed to provide specific outcomes for employees, at lower cost. For this reason, adoption of CITs in that wrapper has been accelerating.
Investors like CITs for their low costs, access to top asset managers and targeted outcomes. They can help investors grow solid retirement assets and lead them to more sophisticated investments. That’s when they will need help from investment managers — making CITs a good place to start.
Will is the Head of Retirement Solutions for Legg Mason. He is responsible for overseeing the sales, marketing and distribution efforts for the team, representing all of Legg Mason’s affiliated investment managers’ capabilities to both domestic and international insurance companies. He graduated from the University of Virginia and the American University of Rome with a major in Italian and received his MBA from the Darden School at the University of Virginia and from Melbourne University in Melbourne, Australia. He holds FINRA licenses 7 and 63.