The Psychology of CITs

In The Psychology of Money, Morgan Housel explores how people’s financial decisions are driven less by logic and spreadsheets and more by emotions, biases, and individual experiences. His insights are relevant not just for personal finance but also for how institutional retirement plans approach investment decisions.

Collective Investment Trusts (CITs) have become an increasingly popular investment vehicle within institutional retirement plans. But despite their advantages – lower costs, transparency, operational efficiencies, strict regulation, and flexibility – some plan decisionmakers and advisors remain hesitant to embrace them. Why? Because, as Housel points out, financial decisions are often influenced less by logic and more by psychological tendencies than you think.

Let’s explore three principles from The Psychology of Money and how they relate to the adoption of CITs in retirement plans.

1. “Reasonable > Rational” – Overcoming Familiarity Bias

Housel argues that people don’t always make rational financial choices; they make choices that feel reasonable based on their experiences. In the retirement industry, mutual funds have long been the dominant vehicle. For some plan sponsors, sticking with them might feel safer because they are familiar – even if CITs may offer better long-term outcomes due to lower fees without sacrificing strict regulatory oversight or retirement investor protections.

Even if cost savings from CITs could be small, they compound over time and could result in substantial improvements in retirement savings. According to the Department of Labor, “Over a 35-year career, a 1% difference in fees and expenses reduces an account balance at retirement by 28 percent.” This statistic maps directly to two prominent quotes from the book:

“Savings can be created by spending less.”

“Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key.”

Advisors should bridge the familiarity gap by educating employer plan fiduciaries and other decisionmakers about CITs [and the CIT onboarding process]. Using case studies, real-world adoption trends, and side-by-side cost comparisons can help decisionmakers see CITs as not just an alternative but an evolution of retirement plan investing.

2. “The Seduction of Pessimism” – Addressing Perceived Complexity

Another key lesson from The Psychology of Money is that people are naturally drawn to pessimism. We tend to believe that complexity means risk, and because CITs are less publicized than mutual funds, some assume they must be more complex, and therefore riskier or harder to administer.

In reality, CITs are built specifically for institutional investors, and robust regulatory oversight, including under ERISA, offers strong investor protection. But lack of familiarity creates a perception of complexity, which can slow adoption.

Instead of framing CITs as a “new” vehicle (which they are not; CITs have been used for over a century), advisors can position them as built exclusively for retirement plans – often offering the same investment strategies as mutual funds but with generally lower costs and structural advantages that benefit participants. When the focus shifts from complexity to efficiency, plan decision makers become more open to change.

3. “Save Like a Pessimist, Invest Like an Optimist” – Long-Term Thinking for Better Outcomes

Housel highlights the paradox of financial success: People should be cautious when saving but optimistic when investing. Institutional investors, however, can lean too heavily on caution, sometimes resisting innovation or being slow to shift from prior investment paradigms. But such caution can yield worse long-term outcomes.

CITs are designed for the long game. Their generally lower fees compound over time, directly benefiting participants. However, if plan decisionmakers are overly focused on short-term hurdles or are hesitant to look beyond legacy investment vehicles, they may overlook the bigger picture.

Advisors and asset managers can reinforce that adopting CITs isn’t about a quick win – it’s about optimizing retirement outcomes over decades. Framing the conversation around participant benefits (rather than operational differences) can help plan decision makers see the true impact of their choices.

In Conclusion: The Psychology of Change

Financial decision-making isn’t just about numbers, even when operating at an institutional level. It can be heavily influenced by perception, emotion, and experience. CITs represent a smart, cost-effective evolution in institutional investing, but their broader adoption requires overcoming behavioral biases. By addressing familiarity bias, demystifying perceived complexity, and reinforcing long-term benefits, we can drive a mindset shift – one that ultimately leads to better retirement outcomes.

The Callan Institute recently reported that 82% of defined contribution (DC) plans are using CITs and they have overtaken mutual funds as the most popular investment vehicle in DC plans.

The transition to CITs isn’t just about changing investment vehicles. It’s about changing how we think about institutional investing. And as Morgan Housel reminds us, the biggest advantage in finance isn’t necessarily found in better spreadsheets, but in better behaviors.