CITs vs. Mutual Funds: Key Differences Explained

Collective Investment Trusts (CITs) and mutual funds are two popular pooled investment vehicles used as investment options for plan participants within their retirement plans. While both can help plan participants reach their retirement goals, CITs and mutual funds differ in many ways, including who regulates them, their fee structures, tax structure, investor eligibility, and reporting standards.

CITs and Mutual Funds: Defined

CITs are tax-exempt, pooled investments that are maintained by a trustee, either a bank or a trust company. They combine assets from retirement plan investors into a fund which is invested according to its stated objective. The trustee oversees the investments made within each fund and holds primary fiduciary responsibilities. Subject to its ultimate oversight, a trustee may engage a third-party investment manager to invest the assets according to a particular agreed-upon strategy. CITs are used by plan advisors and administrators overseeing tax-qualified, defined contribution plans like 401(k)s.

Mutual funds are also pooled investments, except they generally have a higher cost structure and are overseen by a board that hires a registered investment adviser to manage the assets. Mutual funds must be sold through a registered broker-dealer, and are offered to retail as well as institutional investors through a variety of distribution and intermediary channels. Mutual funds cannot vary their management fee but can create separate share classes to vary their distribution and servicing fees.

Three Important Differences Between a CIT and a Mutual Fund

1. Regulatory Guidelines
   CITs and mutual funds differ in the ways that they are governed. CITs are subject to three different regulatory regimes – State and/or Federal banking laws, the Internal Revenue Code (with regard to their tax-exempt status), and the Employee Retirement Income Security Act of 1974 (ERISA); they are also subject indirectly to Federal securities laws, through the obligation to comply with exemptions from those laws. Each of the State or Federal banking regulators, the U.S. Internal Revenue Service (the IRS), the U.S. Department of Labor (DOL) and the U.S. Securities and Exchange Commission (the SEC) helps ensure that CITs are being maintained through well-designed policies and procedures and that their trustees act in the best interest of the plan participants, in compliance with their fiduciary responsibilities under banking law and ERISA. Moreover, investors can gain confidence in this product knowing that CITs and their trustees are subject to the oversight of several government regulators.Unlike CITs, mutual funds are regulated directly by the SEC under Federal securities laws and not by these other regulators (other than the IRS). Mutual fund investment managers hold responsibility for making investment decisions in line with the goals outlined in the fund’s prospectus. Since they typically bear higher operational costs and shareholder expenses, mutual fund fees can be higher when compared to CITs.
2. Eligibility for Investors
   Mutual funds are available for purchase by the public and retail investors. Mutual funds may be subject to redemption fees whereas CITs generally do not impose such fees because they have more sophisticated ways of managing liquidity and any adverse impact on remaining investors in the CIT.To reiterate, CITs, on the other hand, are only available through qualified retirement plans, including tax-qualified corporate plans like 401(k)s and some state and local government plans. Due to this important differentiator, it is essential for trustees to verify plan eligibility. When CIT trustees such as Great Gray onboard a plan, the plan’s eligibility is generally cross-referenced against the plan’s Form 5500 on the DOL website for eligibility along with other information provided by the plan investor, such as its IRS favorable determination letter.
3. Transparency and Reporting Standards
   Today, most CITs issue quarterly fact sheets, and provide data to aggregators and reporting providers, such as Morningstar. Over the past two decades, advancements in streaming data and real-time reporting have significantly enhanced the accessibility and transparency of CITs.A notable milestone occurred in 2019, when Great Gray’s President and CEO Rob Barnett (in his prior role with Great Gray’s predecessor) introduced the first CIT tickers listed on the NASDAQ, marking a new era of transparency and accessibility for investors and plan advisors. This innovation allows investors to track daily CIT performance through aggregators such as Morningstar, Fi36o, BrightScope, and many other reporting systems. Also, effective in 2011/2012, the DOL began requiring plan administrators to provide plan participants with standardized fee, performance, and investment disclosure on all products offered through 401(k) plans under Regulation 404a-5. This applies to CITs as well as mutual funds; much of the disclosure is aligned to mutual fund summary prospectuses.

   While mutual funds also have transparency features like tickers, they serve a much broader public market and generally are not structured specifically for retirement investors. CITs offer consultants the advantage of purpose-built retirement solutions at generally lower costs, alongside operational standards such as daily NAV pricing, fund fact sheets, and other modern transparency features to align with those offered through mutual funds.

CITs: An Efficient Alternative to Mutual Funds for Retirement Plan Advisors and Their Plan Sponsors

Given the lower-cost structure and price flexibility of CITs, they are an attractive option for tax-qualified retirement plans such as 401(k)s. CIT exemptions from securities registration and regulatory requirements, their dedication specifically to retirement plans, their tax-exempt status and their fee flexibility make them generally more cost-effective as compared to mutual funds. This makes CITs a preferred choice for plan advisors looking to optimize investment costs and efficiency.

Reach out today to learn more about the unique advantages of integrating CITs into your client’s retirement plan investment options lineup and the key differences between mutual funds and CITs. 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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