Clearing Up Misperceptions about CIT Transparency

Collective Investment Trusts (CITs) are gaining significant traction over mutual funds, thanks in large part to lower fees and increased investment flexibility. They captured 67% of net inflows for target-date strategies in 2023, with $22.6 billion being converted from mutual funds. Morningstar reports that CITs now account for 49% of the market and are set to surpass mutual funds as the leading target-date vehicle this year.

Their popularity is expected to grow even higher as the federal government moves closer to allowing 403(b) plans to include CITs in their investment options. Millions of teachers, clergy, and nonprofit professionals will have access to the diversified and potentially lower-cost CIT choices available to 401(k) plan participants.

But even as investment professionals recognize the value of CITs, some have suggested there is not enough transparency around them. In reality, that’s an outdated characterization. CITs offer oversight and transparency comparable to investment vehicles like mutual funds and offer certain advantages over mutual funds.

For example, unlike mutual funds, CITs are offered exclusively to tax-qualified retirement plans, subjecting them to different regulatory constraints. This allows for more dynamic and responsive fund management. In comparison, mutual funds must distribute nearly all their taxable income and gains annually, necessitating tax-related portfolio repositioning. Because CITs aren’t subject to this requirement, their management is not constrained by the need to manage taxation from income, gains, or losses from sales.

This flexibility in CIT portfolio management, combined with the retirement-focused and protective regulatory requirements, means that investors in tax-qualified retirement plans can benefit from investment decisions that are not hampered by the complexity of tax-related portfolio adjustments.

In addition to these benefits, investors can gain confidence in this product knowing that CITs and their trustees operate under the watchful eye of several government regulators.

First, they’re subject to the Employee Retirement Income Security Act of 1974 (ERISA), which is overseen by the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA), which points out that, “ERISA protects the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire.” Second, the trustees, whether they’re banks or trust companies, must be supervised and examined by a national or state banking regulator. Third, CITs must comply with related Internal Revenue Service regulations that provide the special tax treatment and benefits that CITs and their investors enjoy.

While there was a time when plan participants had to request CIT data through intermediaries, like an advisor, recordkeeper or data provider, that changed in the mid-to late-2000s, particularly when EBSA adopted ERISA fee disclosure regulations in 2011 to require greater fee and performance transparency for retirement plan participants. Note that this participant-level disclosure expanded on the fee disclosure that the plans and their fiduciaries already were receiving from the CITs.

Advanced data analytics and real-time reporting capabilities have further enhanced the transparency and operational efficiency of CITs.

Similar to how investors can monitor the performance of mutual funds or their favorite stocks using the ticker, they can do the same with many CITs. Great Gray, for instance, lists nearly 650 searchable CIT products on the Nasdaq Fund Network, “which…delivers transparency to investable products to help ensure professionals and non-professionals can make more informed decisions with their assets.”

Enhanced reporting standards, regular audits by independent third parties and investor-friendly initiatives, including the use of CUSIPs, have made it easier for investors to access detailed information about their investments in vehicles like CITs. Through the heightened level of transparency and access to information available to those investing in CITs, advisors, plan sponsors and participants can make informed decisions about where to invest their money just as they do with mutual funds.

The transformation of Collective Investment Trusts from opaque, institutional focused vehicles to more transparent, flexible, lower cost investment options reflects the power of market forces, evolutionary regulation, and innovation. As CITs continue to evolve and gain acceptance in broader retirement planning contexts, they offer a promising path to enhanced performance outcomes that benefit the retirement security for millions of Americans.

by Great Gray Trust Chief Compliance Officer Victor Siclari

This article was originally published in NAPA