Collective Investment Trusts (CITs) have been around since the 1920s, but their popularity has surged in recent years as an investment vehicle option for retirement plans.
CITs share some similarities with mutual funds, but, because CITs are tailored for the institutional retirement market, they can offer distinct advantages, including streamlined administration, fee flexibility and cost-efficiency.
CITs Explained
CITs are tax-exempt, pooled investment vehicles sponsored and maintained by a trustee that is a bank or trust company. CITs combine assets from eligible investors into a single investment portfolio (or fund) to pursue a set of stated investment objectives and strategies.
Investments in CITs are restricted to certain tax-qualified investments, consisting primarily of 401(k) and other defined contribution plans. CITs are cost-efficient investment options, and as such, they can help plan sponsors fulfill their fiduciary duty. As tax-exempt, pooled investment vehicles—available only to defined contribution (DC) and other Employee Retirement Income Security Act (ERISA)-qualified plans—CIT asset growth has outpaced mutual funds since 2018 per Cerulli’s US Monthly Product Trends report.
Because CITs limit investors to eligible retirement plans and are maintained by a bank or trust company, the CITs are not subject to mutual fund regulations and can offer special tax-exempt benefits.
A CIT trustee, such as Great Gray, plays a crucial role in helping to ensure that only qualified plans are invested in CITs; they are the ultimate “fiduciary” responsible for the investment management and compliance oversight of each CIT Fund.
Further, modern trustees are driving CIT adoption by operating on a solid foundation of governance and oversight. CITs must be in proper compliance with banking and securities laws, and trustees help funds remain in good governance with a hyper-focus on investor interests. To learn more about the critical role of a CIT trustee, read “The Role of a Trustee in a Successful CIT Strategy” here.
Why CITs are Trending Up
CITs’ popularity and growth have been notable in recent years. CITs stand out from mutual funds due to distinct regulatory oversight and fee structures. As of June 2024, CITs have officially surpassed mutual funds in target date assets, holding 50.5% of the target date market. Of the investments into target date funds in 2023, CITs represented 67%, or $104.5 billion, of the total flows. In fact, according to Morningstar’s 2024 Target-Date Strategy Landscape research report, $22.6 billion in target-date mutual fund assets converted to CITs in 2023. This trend highlights the significance of CITs as a cost-effective investment option, making them particularly appealing to defined contribution (DC) plan sponsors and intermediaries.
Why Retirement Plans Should Consider CITs
CITs are more than just an investment vehicle. They represent a forward-thinking approach to retirement planning. CITs have a history dating back over 90 years; but they have gained favor over the past decade, driven by innovations, and Great Gray has been at the forefront.
Given their long-tail history, good governance considerations, reliability, fee flexibility, and tax efficiency, CITs should be on a retirement plan’s list of investment vehicle options to consider. By understanding the advantages of CITs, the retirement plan advisor community can better answer common questions from plan sponsors and investors and make informed investment decisions that benefit their retirement goals.
Plan advisors should be aware of a few key considerations when discussing investment options with plan sponsors. These include:
Good Governance: Selecting a CIT should include getting to know the trustee to determine if it has good governance practices, such as transparency, accountability, and oversight, to protect the interests of plan participants.
Visibility and Ease of Access to Information: Daily information about the CIT can be found on the recordkeeper’s website and many CITs offer fact sheets that are updated quarterly with performance and holdings information. Further, many CITs have tickers on the Nasdaq Fund Network (NFN), “which… delivers transparency to investable products to help ensure professionals and non-professionals can make more informed decisions with their assets.” To read more about how CITs have evolved from the past and provide enhanced transparency, read Great Gray’s latest article in the National Association of Plan Advisors here.
Fee Flexibility: Compared to traditional investment options like mutual funds, CITs often have lower fees and expenses, enhancing their appeal for retirement plans. A decrease in expenses can improve participant outcomes. While many CITs have low or no minimum investment requirements, many offer fee reductions as plan level assets exceed certain investment thresholds.
Strategic Flexibility: They allow for rapid adoption of innovative investment strategies, providing plan sponsors with operational agility.
Tax Advantages: Unlike mutual funds, CITs enjoy more favorable tax treatment, offering efficiency in investment growth. Because CITs are restricted to retirement investors, they do not have to abide with taxable income and gains distribution requirements applicable to mutual funds, which free CITs from restrictions that limit how mutual funds must manage their portfolio of investments.
Questions to Ask Plan Sponsors to Initiate Conversations About CITs
CITs offer a powerful tool for plan advisors to diversify investment options. With increased scrutiny on DC plans, CITs present a noteworthy opportunity to offer a broad array of investment options.
Here are two questions we encourage advisors to ask plan sponsors as they explore options for defined contribution (DC) plans:
Would you be willing to consider an alternative to mutual funds if the alternative has comparable performance, potentially lower-cost, tax-advantaged, and provides flexibility?
What impact would the potential for lower fees and enhanced flexibility have on your participant’s long-term investment goals?
If you are not asking these questions of your clients, someone else will.
Reach out today to learn more about the unique advantages of integrating CITs into your client’s lineups. We are here as a strategic ally to guide you in implementing the right investment vehicle for your lineups.
Great Gray Trust Company, LLC Collective Investment Funds (“Great Gray Funds”) are bank collective investment funds; they are not mutual funds. Great Gray Trust Company, LLC serves as the Trustee of the Great Gray Funds and maintains ultimate fiduciary authority over the management of, and investments made in, the Great Gray Funds. Great Gray Funds and their units are exempt from registration under the Investment Company Act of 1940 and the Securities Act of 1933, respectively.
Investments in the Great Gray Funds are not bank deposits or obligations of and are not insured or guaranteed by Great Gray Trust Company, LLC, any bank, the FDIC, the Federal Reserve, or any other governmental agency. The Great Gray Funds are commingled investment vehicles, and as such, the values of the underlying investments will rise and fall according to market activity; it is possible to lose money by investing in the Great Gray Funds.
Participation in Collective Investment Trust Funds is limited primarily to qualified retirement plans and certain state or local government plans and is not available to IRAs, health and welfare plans and, in certain cases, Keogh (H.R. 10) plans. Collective Investment Trust Funds may be suitable investments for plan fiduciaries seeking to construct a well-diversified retirement savings program. Investors should consider the investment objectives, risks, charges, and expenses of any pooled investment fund carefully before investing. The Additional Fund Information and Principal Risk Definitions (PRD) contains this and other information about a Collective Investment Trust Fund and is available at www.greatgray.com/principalriskdefinitions or ask for a free copy by contacting Great Gray Trust Company, LLC at (866) 427-6885.
Great Gray and Great Gray Trust Company are service marks used in connection with various fiduciary and non-fiduciary services offered by Great Gray Trust Company, LLC.
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