The democratization of collective investment trusts (CITs) is an important sea-change in the retirement investment landscape, offering plan sponsors and participants access to cost-effective, innovative, and well-governed investment vehicles regardless of plan size. Embracing CITs may help provide a path for plan sponsors to reduce investment expenses, fulfill fiduciary responsibilities, and offer participants creative and diverse investment choices that support strong retirement outcomes.
Let’s walk through some key features and trends at play:
Democratization of CITs
Ongoing efforts to make CITs more accessible to a wider range of clients have helped make CITs an attractive option in the defined contribution (DC) ecosystem. This shift is partly driven by the rise of new trust companies and the expansion of existing ones, with a focus on enhanced capabilities to support a larger volume of investors.
CITs were once fettered by high investment minimums and trust company limitations that barred all but large and mega-market retirement plan sponsors from access, but these barriers to entry are shrinking. Now, mid-sized and smaller plans can tap into the potential cost savings, innovative product and investment strategies, and enhanced fiduciary oversight provided by CITs.
The impact of this is profound, as CITs help enable a broader range of retirement plans to access lower-cost investment vehicles and diverse strategies, empowering plan sponsors to deliver high-conviction investment choices to their participants—ultimately supporting retirement readiness and financial security.
Cost Efficiency and Savings
CITs can typically offer a lower-cost structure compared to mutual funds, making them an attractive option for plan sponsors seeking to reduce investment expenses and pass those savings on to participants. This cost efficiency is achieved through several factors, including fewer regulatory requirements, lower administrative costs, and the ability to negotiate customized pricing for different unit classes.
The flexibility in CIT fee structures is another advantage: Unlike mutual funds, which must maintain consistent investment management fees across different share classes, CITs can offer varying fees tailored to specific needs. Plan sponsors can negotiate enterprise pricing models, cutting costs even more for their participants. For instance, firms like Morgan Stanley successfully negotiate favorable fees for CITs available to their clients.
These cost savings can have a direct impact on retirement participant outcomes by helping reduce the overall expenses on their retirement accounts, leaving more value on the table to invest and grow over time. In other words, lower fees can potentially translate to higher net returns, enhancing long-term wealth accumulation for participants. This aligns with the fiduciary responsibility plan sponsors face to make sure that investment expenses are reasonable and in the best interest of participants.
Fiduciary Responsibility and Oversight
CITs can align with plan sponsors’ fiduciary duty to pay only reasonable expenses: By providing a lower-cost structure, CITs can help enable plan sponsors fulfill their obligation to minimize costs while delivering high-quality strategies.
CITs’ governance and oversight can add another layer of support. CITs are governed by a Declaration of Trust, which outlines the structure and operational, legal, and regulatory terms of the trust. This framework helps ensure that CITs are managed with a high level of oversight to help maintain integrity and reliability. CITs are also subject to oversight by state banking regulators or the Office of the Comptroller of the Currency (OCC), supporting compliance with applicable regulations.
For many plan sponsors, including CITs as part of their investment lineup can potentially help harmonize with a commitment to fiduciary excellence, with proper due diligence. By selecting CITs, sponsors can help provide participants with cost-effective investment choices that are managed with robust oversight, ultimately supporting retirement outcomes and reducing fiduciary liability.
Product Innovation and Access to Alternatives
CITs can be more flexible than mutual funds and can incorporate asset classes and investment approaches to offer exposure to strategies that used to be unavailable for retirement plans. For example, incorporating alternatives into a retirement lineup can offer participants a more comprehensive and sophisticated investment experience. Alternative investment strategies can also be an advantage for plan sponsors, allowing them to enhance their offerings with private equity, real estate, and other non-traditional asset classes—ultimately providing participants with the ability for greater diversification and potentially higher returns. All investments should be thoroughly vetted for appropriateness and may require additional due diligence to evaluate liquidity considerations, valuation policies, and the investment merits, among other considerations.
Embracing the Future of Retirement Investments
As retirement plan sponsors prioritize cost-saving strategies and explore different investment choices—including some which may not have been available in the past—CITs present unique opportunities. Plan sponsors and retirement participants alike can potentially benefit from learning more about this unique investment vehicle as they consider whether it may fit into a wider strategy to help navigate market volatility and industry shifts.