Even in the multitrillion-dollar retirement plan market, $1.97 trillion is nothing to sneeze at. That’s the amount Morningstar tracks in over 3,200 collective investment trusts (CITs) as of early May 2016.
That figure represents some impressive growth—CITs held an estimated $896 billion in 2008. Callan Associates reports that 71 percent of DC plans included at least one CIT in 2015 versus 60 percent in 2014 and 52 percent in 2013.
Costs Matter
Several factors have driven CITs’ growth. The trusts have retained their cost advantage over most of their mutual fund peers largely because CITs must meet different, less expensive regulatory requirements. Additionally, CITs can provide pricing flexibility through the use of breakpoints, an arrangement that benefits larger plans.
Holly Verdeyen, Director, Defined Contribution with Russell Investments in Chicago, notes that CITs’ fee advantage varies by asset class but averages about 20 basis points. That might not sound like much, but plan costs figure prominently in the current litigious environment. Consider the recent lawsuit by participants in Anthem Inc.’s $5 billion 401(k) plan. Vanguard served as the record-keeper, and before mid-2013, the plan included several of the fund giant’s retail funds, many of which are considered among the least expensive. In 2013 the plan changed its fund offerings to institutional class shares and CITs, but claimants want to recover the higher retail fees paid before the switch-over.
The discussion of CITs versus funds directly addresses the ongoing trend of DC plans’ institutionalization, says Verdeyen. CITs were developed for and are available solely to institutions—individual investors can’t access them through IRAs, for example. In contrast, mutual funds were designed for the retail market. “If you want an institutionalized defined contribution program, it would be natural to look for vehicles that were developed for institutions, moving away from the retail mentality of mutual funds and style boxes and brand-name funds,” she says.
Improved Investment Options and Accessibility
Early CITs often included a fairly limited range of asset classes, but that’s changing. Traditional asset classes such as U.S. equity and taxable bonds are still among the largest CIT groups. But Morningstar’s CIT database now tracks substantial amounts in alternatives, commodities and international equities, as well. This broader range allows plans to select CITs over mutual funds more frequently.
Minimum asset requirements are another hurdle because CITs generally have higher minimums than mutual funds, but there is often some flexibility with meeting minimums, Verdeyen notes. Consultants may be able to use their scale to aggregate smaller plans’ assets and then negotiate with the CIT provider on the basis of the combined assets, which gives the smaller plans additional leverage.
Better Processing and Communications
Another problem with early CITs was that they provided quarterly valuations, unlike mutual funds, which provide daily valuations. That constraint benefited mutual funds historically. In its 2015 report, “Collective Investment Trusts,” the Coalition of Collective Investment Trusts notes that “Mutual funds, with daily valuations and greater portfolio transparency, especially performance information, quickly overshadowed CITs and other vehicles, becoming the preferred vehicle of choice for most DC plans.”
CITs are overcoming those limitations. Daily trust valuation is now widely available and the industry is standardizing and automating daily processing. Information about the trusts is also more readily available through fact sheets and research services like Morningstar.
Overall, there are more similarities than differences between CITs and mutual funds nowadays, says Verdeyen. “The collective trust market has really institutionalized over the last, probably I would say, 20 years. Most of these collective trusts now trade [through] the National Securities Clearing Corporation, NSCC, so they’re daily valued, [and] there’s good participant communications available like fact sheets. They have very sound regulation. They’re regulated by different bodies, but I think both are very soundly regulated.”
Best Practices
These improvements in trusts’ operations and the intense scrutiny of DC plans’ costs should lead consultants to consider if their plan clients are candidates for CITs, says Verdeyen. “If they’re large enough to be in collective trusts and they haven’t looked at them yet, to me it would be in the best interest of plan participants to consider lower-cost vehicles like collective trusts.”
It’s also becoming best practice to harmonize approaches across retirement plans in organizations that offer multiple plans. If a company’s defined benefit plan uses CITs but the DC plan does not, can the plan sponsor justify that discrepancy? “Why is this a best practice when it’s the company’s money, but when it’s somebody else’s money we’re going to choose a different best practice?” Verdeyen asks.