Collective investment trusts have been capturing lots of attention and assets lately. CITs offer retirement-plan fiduciaries an attractive, generally lower-cost alternative to mutual funds. Assets invested in these vehicles have grown from about $900 billion in 2008 to over $1.5 trillion at the end of 2014, according to Pensions & Investments data.
The low-cost dimension of CITs has also caught the attention of famed litigator Jerry Schlichter, of Schlichter Bogard & Denton. Mr. Schlichter has made quite an impact on the retirement marketplace by holding fiduciaries accountable for being highly cost-conscious and diligent in choosing the most appropriate investments and service providers on behalf of plan participants.
At the end of last year, the Schlichter law firm filed suit in the case of Bell et al. versus Anthem Inc., alleging in part that lower-cost CITs should have been selected for Anthem's 401(k) plan instead of “identical” higher cost mutual funds. The complaint alleges other fiduciary breaches as well, some of which appear to be CIT-related.
CITS VS. MUTUAL FUNDS
Plan fiduciaries and investment fiduciary advisers need to be well versed in CITs and how to evaluate them. To overlook these investment vehicles in circumstances where they are available and may be appropriate, risks at least criticism, if not recourse from plan participants.
CITs are comparable but not identical to mutual funds. They, like mutual funds, involve pooled investments that can be managed actively or passively in most asset classes. Daily valuations are available for both vehicles with transparency regarding the holdings, and they are accessible with low or no minimums (although these features have only recently become true for CITs). Both qualify as acceptable qualified default investment alternatives under the Pension Protection Act of 2006 and can be used as the underlying vehicles in target-date funds.
Differences between CITs and mutual funds fall principally in the areas of availability for different account types, regulation, governance and administrative matters. The biggest difference is that CITs are only available to qualified plans, not individual investors. They are issued and managed by banks and trust companies with oversight by the Office of the Controller of the Currency and state regulators, versus the SEC in the case of mutual funds.
The different legal and regulatory regimes for CITs versus mutual funds provide certain cost advantages for CITs, but pose potential drawbacks. While daily valuations are the norm, they are not required for CITs. Mutual funds have more standardized and extensive reporting and disclosure requirements.
The process of analyzing the internal investment and administrative expenses for CITs and mutual funds is pretty much the same, but fiduciaries must be alert to potential external costs specific to CITs. Operational differences may result in higher expenses for record-keeping services and for reporting of data and performance reports.
The following are important criteria to be considered from an investment selection perspective:
• Minimum track record, with at least three years of history suggested.
• Stability of the organization and tenure of managers.
• Assets in the investment (particularly important in regard to anti-dilution measures).
• Alignment and consistency of the portfolio composition to the desired asset class allocation.
• Style consistency with desired peer group representation in the portfolio.
• Expense ratios and fees relative to peers.
• Absolute and risk-adjusted performance relative to peers.
• In the case of target-date funds, alignment of the glide path to participant characteristics.
Service factors, such as participant education, may also come into play in the due-diligence process. The fiduciary must reasonably determine that these services are of sufficient value to participants to justify any added cost involved.
Blaine F. Aikin is executive chairman of fi360 Inc.