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T H E C O L LE C movement
TIVE
The rising popularity of
collective investment trusts
In DC plans of all sizes, the use of collective
investment trusts (CITs), also known as
commingled funds, collective investment
funds or collective trust funds, is growing.
A long-time popular choice of defined benefit (DB)
plans, CITs have increasingly become a choice of
defined contribution (DC) plan sponsors in recent
years. As investment expense is generally the largest
single expense associated with a retirement plan,
lower-cost vehicles, including CITs, provide plan sponsors
and participants the potential for considerable savings as
the industry becomes more focused on driving down plan
costs to enhance performance and avoid fee litigation.
CIT
54.3%
The potential pricing flexibility and cost
advantages that CITs offer when compared
with other investment vehicles are
translating into greater demand in the
DC market:
•C
ITs in DC plans have grown by 68% since
2008, with assets rising to more than
$1.5 trillion by the end of 2014.1
•O
f the 100 largest corporate DC funds
by vehicle in 2016, CITs make up 54.3%,
more than mutual funds, separate
accounts and ETFs combined.2
Understanding the potential benefits of
CITs, and how they differ from traditional
Investment Vehicle
54.3%
CIT
CITs REPRESENT MORE THAN HALF
OF THE INVESTMENTS USED BY THE
100 LARGEST CORPORATE DC FUNDS
35.0%
MUTUAL FUND
10.6%
SEPARATE ACCOUNT
mutual funds, can help DC plan committees
determine if transitioning to CITs would be
to a plan’s advantage.
CIT BASICS
CITs are tax-exempt, pooled investment
vehicles maintained by a bank or trust
company exclusively for qualified plans,
including 401(k)s, as well as for certain
types of government plans. They are
similar to mutual funds, but with important
differences. Like mutual funds, CITs
are designed to facilitate investment
management by combining assets from
0.1%
ETF
eligible investors into a single investment
portfolio (i.e., a “fund”) with a specific
investment strategy. However, collective
trusts are exempt from the investment
company registration requirements of the
Investment Company Act of 1940 and
the securities registration requirements
of the Securities Act of 1933. These
exemptions apply since collective trusts
can only be offered by a bank to certain
qualified employee retirement plans, and
are not available to the general public. This
does not mean that CITs are unregulated;
CITs and respective bank trustees are
supervised by the Office of the Comptroller
Pensions & Investments, “Use of CITs in DC Plans Booming,” February 22, 2016. 2Pensions & Investments, “Assets of the P&I DC 100 Increase 5.1% to $1.12 Trillion,”
March 7, 2016.
1
of the Currency (OCC), or a state banking
regulator, depending on the type of bank.
CITs can include any of the investment
assets that are in mutual funds, they can
be actively managed or index funds,
funds of funds (FOFs), or non-traditional,
such as REITs. CITs are particularly useful
in single-manager or multi-manager
FOFs, such as asset allocation (target
risk or balanced) and target date funds
(TDFs). These investments are growing
in popularity due to their designation as
Qualified Default Investment Alternatives
(QDIAs) under the Pension Protection Act
(PPA). Today, the CIT structure is increasingly
deployed in TDFs — often in an openarchitecture approach giving plan sponsors
a means of creating custom glide paths
for their participant population at an
affordable price.3
Like other investment vehicles, CITs must
follow ERISA regulations and are subject
to rules of the Department of Labor (DOL).
Each fund is managed and operated in
accordance with the applicable trust’s
governing documents, which generally
include a declaration of trust (or plan
document) and the fund’s statement of
characteristics. Under ERISA, plan sponsors
must disclose their arrangements with CITs
on their 5500 forms and participants must
receive at least quarterly notification of
their positions.
FEE & FLEXIBILITY ADVANTAGES
Lower costs or fee advantages are a
clear benefit of CITs over the mutual fund
approach. In comparison to mutual funds,
CITs typically have lower administration,
marketing and distribution costs:4 because
CITs are not subject to oversight from the
U.S. Securities and Exchange Commission
(SEC), they do not incur some of the
expenses associated with compliance and
regulatory reporting. There is no need to
support the marketing and distribution of
the fund into the retail space (e.g., producing
prospectuses and maintaining retail
call centers). Participant recordkeeping
generally is at the plan level, rather than the
CIT level, which can allow greater flexibility
on recordkeeping structure and costs.
This can all result in both lower initial and
ongoing operational costs. As a result, CIT
fees can be 20 to 25 basis points less than
mutual fund fees.5
Collective
Investment
Trusts
POOLED INVESTMENT VEHICLES
USED ONLY IN CERTAIN QUALIFIED
RETIREMENT PLANS
HAVE BANKS OR TRUST COMPANIES
AS FIDUCIARIES
REGULATED BY THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY
(OCC) OR INDIVIDUAL STATE
BANKING AUTHORITIES
OVERSEEN BY THE IRS AND DOL (ERISA)
•R
equires Form 5500
•F
ee Disclosure to Plan Sponsors
(Rule 408b-2)
•P
articipant Reporting Requirement
(Rule 404a-5)
ELIGIBLE STRUCTURE FOR QDIA WITHIN
APPROVED CATEGORIES (TARGET
DATE/TARGET RISK, BALANCED)
DAILY NAV AVAILABLE TO PARTICIPANTS
THROUGH PLAN PHONE NUMBER
AND WEBSITE
Plan sponsors interested in securing lower
plan fees are also attracted by an ability to
negotiate investment management fees
and, in most cases, plan asset (or TDF asset
size) minimums. As CITs do not have 12(b)-1
fees, DC plans looking to reduce or eliminate
revenue-sharing and shift to a per-person
administrative fee model are gravitating to
this investment vehicle option. Both factors
help to drive CIT growth: according to Callan
Associates, 71% of DC plans offered at least
one CIT in 2015, up from 60% in 2014.6
The shift to collective trusts offers
additional benefits beyond lower fees.
While CITs are by definition collective
vehicles, they can be created specifically
for large institutional investors. Plan
sponsors also like the flexibility CITs can
offer in terms of pooling together assets
across multiple plans, often a common
goal of large organizations with a history
of M&A activity.
THE EVOLUTION OF CITs
While CITs have been used for more than 75
years, improved features have helped fuel
their rise in DC plans. In 2000, CITs began
trading on the National Securities Clearing
Corporation (NSCC) Fund/SERV® platform,
allowing automated trading and daily
valuation, putting CITs on an equal footing
with mutual funds for ease of investment.
The PPA’s designation of CITs as accepted
QDIAs gave a tailwind to the investment
vehicle in 2006. Over the past few years,
providers have addressed many of the
early limitations of CITs, including
lowering qualifying plan minimums
to allow smaller plans access to the
fee-advantaged investment option,
and enhancing fund information with
fee, risk and performance transparency
to participants.
In the past, plan sponsors were hesitant
to consider CITs due to a perceived lack
of information for participants on the risks
and performances of holdings (CIT investors
do not receive an SEC-required prospectus,
CITs do not have ticker symbols, and
ratings from independent research
firms were generally not available).
While CITs generally have less frequent
and less complex shareholder reporting
requirements, DOL Rule 404a-5 requires
plan administrators to standardize
strategy, risk, performance and expense
disclosures of all investments (including
CITs) to help participants make betterinformed decisions. With advances in
technology and increased usage, CITs have
evolved to offer greater transparency and
education to participants via third-party
data aggregators (such as Morningstar®)
and enhanced CIT provider data reporting
and fund fact sheets available online and
through plan call centers.
In comparison to mutual
funds, CITs typically have
lower administration,
marketing and distribution
costs. On average, CIT fees
can be 20 to 25 basis points
less than mutual fund fees.
³Planadviser, “Growth in CIT Use Driven by Familiar Market Factors,” March 30, 2015. 4The Coalition of Collective Investment Trusts, “Benefits of CITs,” 2015. 5Cerulli
Associates, Institutional Markets, 2014. 6Callan Associates, 2015 Annual Survey.
CONSIDERATIONS
CITs continue to grow in popularity for a
variety of reasons, including recordkeeper
acceptance, consultant familiarity, pricing
flexibility, daily valuation, NSCC Fund/SERV®
compatibility and improved reporting and
transparency as a result of compliance
with DOL disclosure requirements under
ERISA. Plan sponsors also appreciate that
CIT trustees are subject to ERISA fiduciary
standards with respect to ERISA plan
assets invested in CITs.7
Together with the plan’s advisor/consultant
and ERISA attorney, plan sponsors should
consider the following questions to
determine whether transitioning to CITs
within the plan’s investment lineup would
benefit the plan and participants:
Is the plan provider’s current investment universe appropriate?
Is the cost structure appropriate given the plan size, the services provided and the scope of desired
investment options?
Is there an opportunity to customize fees based on plan needs?
Would the plan benefit by switching some asset categories to CITs due to cost- or fee-adjusted performance?
What type of data and/or reporting will be supplied to the plan?
What communications, education and information will be supplied to plan participants? In what format?
Are there any liquidity boundaries, trading issues or operational considerations?
How experienced is the asset manager, and what is the firm’s reputation in the marketplace?
Given all available information, is the investment vehicle the best fit for the plan participants and
their beneficiaries?
Median Fee Comparison (basis points)
MUTUAL FUND
COLLECTIVE
INVESTMENT TRUST
MEDIAN FEE
DIFFERENCE
55.0
35.0
20.0
U.S. FIXED INCOME
83.0
60.0
23.0
LARGE-CAP EQUITY
125.0
100.0
25.0
EMERGING MARKETS EQUITY
105.0
80.0
25.0
ALTERNATIVES
Data is specific for a mandate size of $25 million and includes active and passive products. Fees are generally subject to a sliding scale.
Source: Cerulli Associates, Institutional Markets 2014: Gaining Marketshare as Shifting Portfolio Construction Presents New Opportunities and Challenges.
THE EVOLUTION OF CITs
Early CITs
Lack of pricing flexibility at the plan level
Limited product offerings
Quarterly valuation
Manual processing of investor contributions and withdrawals
Limited performance calculations based on quarterly valuations
Limited availability of fund data
Used almost exclusively in DB plans
Modern CITs
Plan-level pricing flexibility often available
Expanded universe of investment objectives
Daily valuation
Potential for more standardized and automated daily processing
Performance generally available due to daily valuations
Fund fact sheets and enhanced data reporting
Used in both DB and DC plans
Source: Coalition of Collective Investment Trusts, “Collective Investment Trusts” white paper, 2015.
Pensions & Investments, “Assets of the P&I DC 100 Increase 5.1% to $1.12 Trillion,” March 7, 2016.
7
Stacking up
MUTUAL FUNDS
OPERATIONAL
Regulated by the Securities and Exchange Commission under
Investment Company Act of 1940, as amended; subject to
numerous restrictions and limitations
Publicly available performance information; performance
information published in newspapers and online;
most are Morningstar® rated (if 3 years old)
Single management fee charged; investors in different share classes
may pay different amounts for other services or distributions
May include 12b-1 fees
Generally restrict access to, or require high minimums
for, lower-cost institutional share classes**
TRANSACTIONAL
Employee may be able to roll over mutual fund holdings from
some retirement plans to another retirement plan or to an IRA
Funds are more substantively regulated, making
portfolio management and operations more complex
May be subject to redemption fees*
T+1 settlement
NSCC clearing available
Ready liquidity and daily valuation standards***
vs.
similarities
&
CITs
differences
Overseen by bank regulators and subject to ERISA/DOL
regulation
Can access performance information through retirement recordkeeping
website; distribution of more uniform performance information*;
some CITs are Morningstar® rated (if 3 years old)
Different fee structures based on services and size of plan
No 12b-1 fees
Commonly have no or low minimums
When employee leaves plan, CIT cannot be rolled over
into an IRA
Generally subject to fewer investment and
operation regulations
Generally no redemption fees
T+1 settlement
NSCC clearing available
Daily valuation and ready liquidity available on
many CITs offered in DC plans****
*Rule 404a-5 requires standardized disclosure on fee and performance for all investment options offered in participant-selected retirement plans.
**This comparison is general in nature only and is not an exhaustive list of distinguishing features. It also does not account for retirement plan
relationships where features of these products may be different (e.g., applicability of redemption fees).
***Mutual fund shares are redeemed at current NAV, which may be more or less than original cost.
****This comparison is general in nature only and does not account for retirement plan relationships where features of these products may be
different (e.g., applicability of redemption fees). CIT units are generally redeemed at current NAV, which may be more or less than original cost.
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BNY Mellon
BNY Mellon Retirement personnel act as licensed representatives of MBSC Securities Corporation (a registered broker-dealer) to offer securities, and act as officers of
The Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds as well as to offer separate accounts managed by BNY
Mellon Investment Management firms. BNY Mellon Investment Management encompasses BNY Mellon’s affiliated investment firms, wealth management services
and global distribution companies, including MBSC Securities Corporation and The Bank of New York Mellon. BNY Mellon is the corporate brand of The Bank of New
York Mellon Corporation.
The material contained is for general information and reference purposes only and is not intended to provide or be construed as legal, tax, accounting, investment,
financial or other professional advice on any matter, and is not to be used as such.
This article appeared in the Winter 2016 issue of Planet DC magazine.
© 2016 MBSC Securities Corporation
MARK-2016-11-07-0695
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