Chances are, you’ve heard of collective investment trusts (commonly referred to as CITs). CITs are tax-exempt, commingled or “collective” funds maintained by a bank or trust company exclusively for qualified plans (including a 401k).
They’re typically associated with larger plans, which in the past has given them a reputation for being largely unattainable for most plans. CITs offer structural flexibility, daily valuation, and broad availability on recordkeeping platforms. Those benefits exist along with affordable pricing.
How CITs Work (For Everyone)
In the last two years, there’s been a trend toward firms working collectively to aggregate their assets, as well as aligning with trust companies and investment providers to create CITs that have lower minimum investments.
In some cases, there are options available now for CITs with no minimum investment. CITs often have lower administration, marketing, and distributions costs as compared to ’40 Act mutual funds. Newly created aggregated CITs represent the shift in the <$1 billion marketplace learns and adapts to what’s happening at the top end of the retirement plan space.
These investments typically bring lower cost investments to plans regardless of plan size. Ask yourself, why should an employee of Home Depot have significantly lower costs for the same retirement plan investments as an employee of a local mom and pop hardware store?
Collective investment trusts offer mega plans custom pricing; a plan can negotiate with an investment provider based on their retirement plan’s scale and lower investment expenses. This is a departure from ’40 Act mutual funds retirement plans use where they are beholden to the prospectus’ pricing. Investment firms that are aggregating their assets, viewed as a mega plan in the eyes of investment providers, use this fee flexibility to create CITs with lower expenses.
There’s a tremendous opportunity for you to deliver tangible value and differentiation to plans below $500 million in AUM. Understanding CITs, having a handle on the opportunities available, and having open discussions with your clients about the pros and cons will separate you from the competition.
Why CITS Now?
CITs have been around a long time (90 years to be exact). Why the sudden interest? Because the game has essentially changed. Firms are now working together to pool their opportunities and bring mega plan benefits down market.
Callan’s 2017 Defined Contribution Trends Survey highlights CIT utilization in plans has grown 35% 2012- 2016 while mutual funds and separate accounts have fallen over the same timeframe.
The Callan research is skewed toward mega plans – nearly 46% of the 165 respondents being >$1 billion plans – yet it’s very telling for what the future may hold for the <$1 billion marketplace.
The largest retirement plans are often the early adopters of innovative programs like financial wellness, managed accounts, and robo-advice. There are opportunities to watch and learn from mega plans, shape an idea or a program for the <$1 billion marketplace, and bring innovation to plan sponsors and your clients.
Let’s talk about the retirement plan marketplace from a macro perspective.
In an assessment of nearly 55,000 retirement plans, the average plan size is pennies over $6 million. 97% of the retirement plans in the sample are under $25 million in AUM and 99.9% of the retirement plans are under $500 million in AUM. That’s not terribly shocking. What’s so important about the $500 million-dollar threshold? These are the retirement plans that historically might have begun to think about adding a CIT to their line-up.
The mega plan marketplace is changing line-up composition and embracing CITs. Why? While data vary depending on what you read and where, a simple assessment of current Morningstar data for 4,152 Large-Cap ’40 Act mutual funds and 585 Large-Cap CITs yields an average net expense ratio of 106 bps v. 40 bps or 62% less expensive.
Understanding it’s impossible to simply move a retirement plan’s line-up entirely to CITs; it is important to think about what a reduction in investment expense means to an employee and their retirement savings.
90 Years of CIT History
Are CITs Right for Your Business?
Think CITs might be a good fit for your business model and your clients? Take a few minutes to think about your practice, your clients, and those that might be delighted about a conversation on how to return more dollars to their employees. Five things you can think about or do when you’re considering CITs:
- Think about your smaller clients who have never benefitted from truly institutional pricing; you may have a real opportunity to differentiate yourself by bringing CITs to their committee
- Review your client’s investment line-up and look for positive pricing opportunities
- Consider using index CITs to lower costs on your ’40 Act passive investment investments (including TDF)
- Think through the clients you have with a stable value investment. These clients essentially have already experienced a CIT sale
- Ensure your largest clients have a well-priced investment lineup; your competition is looking and so should you
The CIT trend up-market is going to continue. The largest plans in America are sensitive to litigation risk, delivering value to their participants, and streamlining their retirement plans to help their employees retire on time.
These aren’t opportunities or concerns that are the purview of only the largest plans. These are questions advisors and plan sponsors should be asking themselves as they continue to effectively manage their benefits.
Christopher Giles is the Senior Managing Partner of GRP Advisor Alliance and Foundational Retirement Solutions and is responsible for ensuring strategic programs are designed, executed, and delivered to advisors and plan sponsors. Christopher has a Bachelor of Science in Business Management and Marketing from Cornell University in Ithaca, NY.