In a long-forecasted development, Collective Investment Trusts (CITs) have officially outpaced mutual funds as the most popular target-date vehicle as of this year, according to Morningstar’s annual target-date landscape report, released in August.
CITs are tax-exempt, pooled investment vehicles that are managed by a bank or trust company and are offered only to qualified retirement plans. They have gained traction due to their lower costs, greater flexibility, and institutional pricing advantages. To learn more about the growing popularity of CITs in retirement plan lineups, 401(k) Specialist spoke to David Cohen, Global Head of Stable Value and Guaranteed Products & Head of US Retirement Investment Product at John Hancock.
Head of US Retirement Investment Product
Responsible as the product channel head for the company’s $13.7 billion Collective Investment Trust asset management business (as of September 30th, 2024), and a leader of the John Hancock Trust Company, David shares his insights on how CITs compare to mutual funds in terms of fees, performance, and flexibility for retirement plans. With their growing popularity in the qualified retirement space, the following Q&A provides guidance on how plan sponsors and advisors can leverage them to offer personalized and cost-effective solutions for participants.
401(k) Specialist: How do CITs compare to mutual funds in terms of fees and expenses? Are there potential cost savings for plan participants, and if so, how can they be achieved?
David Cohen: CIT funds, depending on the size of the investment and the type of investment may be offered at a lower cost than mutual funds. Typically, the cost savings for plan participants are offered through institutional arrangements between the plan’s financial advisor, consultant or at times the plan’s recordkeeper directly with the Fund Manager or Trust Company. Plan participants should discuss this with their Plan’s Administrator to see what potential costs savings are available within their investment line-up.
While used less frequently today, there are often mutual fund share classes that might offer revenue sharing to the recordkeeper which might be of interest if it can reduce the overall cost for a participant. CITs normally do not provide a revenue sharing option, although in theory, they could.
401(k) Specialist: How do CITs perform relative to mutual funds and other investment vehicles commonly used in 401(k)s, and are performance metrics easily accessible for plan participants?
Cohen: Historically, the performance of CIT funds has generally been in line with mutual fund and other retirement investment vehicles as typically a successful mutual fund or other investment vehicle will be replicated as a CIT with the same underlying holdings and portfolio management team. Performance variance between mutual funds/other vehicles and CITs may occur due to cash flow activity and fee differences.
The other difference worth noting that plan participants should be aware of is that typically mutual fund/other vehicles will have longer performance track records relative to a CIT. However, due to the popularity and growth of CITs over the last several years, performance and portfolio metrics are as readily available as mutual funds and other vehicles metrics typically in the form of a Fact Sheet that is offered through the plan’s recordkeeper.
Another way that CIT providers, like John Hancock, are replicating best practices from our mutual fund franchise, is we are now offering Tickers for CITs which allows anyone with access to the internet to get CIT performance information.
401(k) Specialist: How flexible are CITs in terms of customization for plan sponsors, such as the ability to incorporate specific investment strategies?
Cohen: Because CITs can be established more quickly and economically than a mutual fund, it is possible to create a CIT with an investment strategy designed to suit a particular client’s needs but typically for the plan sponsor to achieve their custom investment goals the deposit size needs to be large enough that the operating expenses for their specific investment strategy are reasonable and prudent for their participants. However, when we do see requests for specific investment strategies, they have been focused on custom target date, using a John Hancock CIT Fund as part of a larger custom model allocation and stable value funds. Over the last several years John Hancock has experienced more requests for fee customization for clients rather than custom investment strategies and CITs offer the flexibility to accommodate custom pricing.
401(k) Specialist: Can CITs be tailored to meet the unique needs of a 401(k) plan, particularly in terms of target-date funds or ESG investments?
Cohen: Absolutely, 401(k) plans and their investment advisors may have a strong preference on how conservative or aggressive they want their age-based target date portfolios to be. This concept has become more prevalent in the large and mega plan space, as those plans may want to introduce privates or a custom retirement income component to their target date CIT funds. It is relatively easy for a firm like a John Hancock to create a custom share class for the Plan Sponsor or Advisor Group that will then have the desired pricing for that investment strategy.
Additionally, ESG funds, and other thematic investing whether they are offered as a standalone CIT or as part of target date or managed account solution that use CITs can be tailored to suit the unique needs of a 401(k) plan.
401(k) Specialist: Regarding the onboarding experience, how can advisors explain CITs to plan participants in a way that’s easy to understand, especially given that participants are generally much less familiar with them compared to mutual funds? Are there known participant communication strategies that work best to ensure engagement and comprehension?
Cohen: Advisors who recommend CITs to plan sponsors can take comfort that the participant experience to purchase into a CIT is no different than transferring money in and out of a mutual fund in their retirement plan’s investment lineup today. The CIT onboarding experience occurs at the plan level with the plan’s fiduciary and their investment advisor to complete the necessary paperwork that ensures that the plan’s participants are eligible to invest into a CIT and that the CIT can assist the plan with any tax reporting requirements.
In our view, the best strategy is for CIT fund managers to work with the plan’s recordkeepers to create participant friendly educational material that explains what a CIT fund is, how it works and how investing into one may improve retirement outcomes. We offer this today with our John Hancock recordkeeping platforms.
401(k) Specialist: Are CITs available to all plan sizes, or are they typically restricted to larger plans with greater assets?
Cohen: Historically, CITs had large deposit minimums; however over the last decade deposit minimums have decreased significantly as CITs have become increasingly the investment vehicle of choice in the qualified retirement space with some CIT funds no longer even having a deposit minimum.
In short, access to CIT funds now more than ever can be leveraged across all plan sizes; availability will be dependent on plan recordkeeper. Normally, the reason to select a CIT over a mutual fund is cost based, but at lower investment levels, the least expense mutual fund share class might be very close to the CIT share class price that would be available. The long, highly efficient trading of mutual funds might be preferred to saving a few basis points on smaller investments.
401(k) Specialist: What due diligence processes should advisors follow when considering CITs for their 401(k) plans?
Cohen: Advisors, as part of their investment due diligence process should consider many of the same factors they do when evaluating a mutual fund or any other investment vehicle commonly used in 401(k) plans, including: performance, fees, CIT asset size, whether the CIT is a prudent investment for their client, any risks associated in the CIT fund and carefully review the CIT’s Declaration of Trust, 408(b)(2) disclosures and any other documents the CIT offers.
A caution for advisors is to not assume that the CIT from the same investment company will perform in line with the similarly managed mutual fund. As noted above, it is important to review the disparity during one’s analysis.
401(k) Specialist: Can CITs have a role to play to assist with innovation to personalize 401(k) menus for participants?
Cohen: Personalization of 401(k) investment menus for participants has evolved over the last several years as plan participants goals have shifted from a savings-focused mentality in their 401(k) plan to achieving a higher rate of return on their investments to generate income for their retirement goals. At the heart of that journey has been the increased use of CITs as the vehicle of choice in these QDIA-approved options such as target-date CIT funds (TDFs), lifecycle funds, managed accounts, advisor managed accounts and balanced funds.
While today these options attract the most significant amount of participants’ investments, innovation leveraging CITs to improve retirement outcomes is where John Hancock is focusing our efforts with the goal of identifying ways to provide more dynamic income-generating solutions for participants to utilize to achieve their retirement goals. While our research continues, initial findings indicate that participants may require a more dynamic solution where they can better understand how their personalized investment choices impact their retirement saving goals.
401(k) Specialist: As the CIT Industry continues to evolve with asset managers leveraging their own captive trust companies and, in some cases, also using third party trust companies, what is John Hancock’s approach?
Cohen: John Hancock Trust Company has been a state-chartered trust company since 2011. Like many asset managers at that time, we originally started the trust company to support our institutional asset management business. As CIT funds have become more popular and are being offered to many of the same advisors that also purchase our mutual funds, it made sense to leverage our mutual fund infrastructure and captive transfer agent to be able to offer our CIT funds through all our distribution channels (Institutional, Retail and Retirement). This includes utilizing John Hancock’s bandwidth to onboard a significant number of clients and recordkeepers at once, which is a primary reason why asset managers have historically leveraged third party trust companies.
- Learn more about the potential benefits of CITs here: https://www.jhinvestments.com/collective-investment-trusts
Neither David Cohen nor John Hancock Trust Company are affiliated with 401(k) Specialist or Brian Anderson. The opinions expressed by David Cohen are those of David Cohen, Portfolio Manager, Head of Stable Value, Head of Institutional and Retirement Investment Product, U.S. at John Hancock, and are subject to change. This commentary is provided for informational purposes only and is not an endorsement of any security, collective investment trust, mutual fund, sector, or index. John Hancock is not responsible for the comments by or views of anyone not affiliated with John Hancock or its affiliates.
A Collective Investment Trust (CIT) is a pooled investment vehicle that is maintained by a bank or trust company for the collective investment of certain qualified retirement plans only. CITs cannot be publicly marketed or sold. CITs are exempt from registration under the federal securities laws and exempt from the regulatory requirements on mutual funds under the Investment Company Act of 1940; however, they are subject to federal and state regulation under the banking laws, the Employee Retirement Income Security Act of 1974, the Internal Revenue Code, and certain securities laws. A mutual fund is a publicly traded pooled investment fund that are offered through registered investment companies overseen by the US Securities and Exchange Commission. A mutual fund is a pooled collection of assets that invests in stocks, bonds, and other investments and is regulated by the U.S. Securities and Exchange Commission.
CITs are not subject to the regulatory, operational, reporting, and disclosure requirements of mutual funds. Administration, distribution, and marketing costs are generally lower than those for mutual funds as well.
John Hancock CITs maintained and distributed by John Hancock Trust Company, LLC, 197 Clarendon Street, Boston, MA 02116, jhinvestments.com
John Hancock Retirement Plan Services LLC offers administrative or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, New York. Product features and availability may differ by state. Securities offered through John Hancock Distributors LLC. Member FINRA, SIPC.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
