401(k) Specialist has retracted a post originally published on May 2, titled, “Opinion: CITs Understate Fees for Target Date Funds,” by contributing author Ron Surz.
The column contained factual errors, detailed in separate responses below from Great Gray Trust Company and T. Rowe Price. 401(k) Specialist regrets any confusion the misstatements in the piece have caused, and this post is intended to provide a correction for the record. In addition to subsequent comments below, author Ron Surz offered the following statement:
“My sincere apologies for formulating a faulty opinion, and for any misunderstanding I may have caused. The costs of underlying CIT TDF funds are actually zero when reported as such.”
What follows are separate responses to the inaccuracies in the May 2 column provided to 401(k) Specialist by Great Gray Trust Company and T. Rowe Price.
Statement from Great Gray Trust Company:
Opinion: CITs Understate Fees for Target Date Funds (initially published on www.401kspecialistmag.com and further distributed by BenefitsLink.com Retirement Plans Newsletter on May 2, 2024).
- Because the opinion article was fundamentally inaccurate and misinformed investors, we requested that it be retracted or corrected. Our request was honored and the article was removed from the 401(k) Specialist website on May 7.
- Great Gray Trust Company fully discloses the total fees charged for investments in our target date funds and other CITs, including those charged by underlying funds. There are no “excessive hidden fees” as the opinion article inaccurately claimed.
- As we explain below, the claim in the title that CITs understate fund fees and the opinion the author expressed in the article are based on two mistaken assumptions, which we are glad to correct with respect to Great Gray Trust Company CITs generally and the specific CIT the author uses as an example.
- Assumption 1: The author mistakenly assumes that the Great Gray target date CIT he uses as an example invests in mutual funds. It does not. It invests in other CITs. The fact sheet he references clearly discloses that fact at the very beginning and also identifies the ten largest holdings, which are CITs, not mutual funds.
- Assumption 2: The author also mistakenly assumes that there are fees charged by underlying funds (i.e., the funds into which the CIT invests) that are not disclosed in the fee table of the CIT fact sheet. That is also incorrect. In fact, the Great Gray target date CIT that he uses as an example invests in zero fee classes of the underlying CITs. So, the underlying funds charge zero fees—as the fee table reflects. The fee table also reflects a flat 18.5 bp “Management Fee” that the CIT separately and directly pays to the sub-adviser for managing those underlying CITs.
- Essentially, the author compounds the mistake in his first assumption by basing a second assumption on it. He mistakenly assumes that the 18.5 bp “Management Fee” in this target date CIT’s fact sheet fee table must not be attributable to managing the underlying funds because he assumes that the underlying funds are mutual funds and their fees are 40 bp. However, as noted above, this Great Gray target date CIT does not invest in mutual funds. It invests in zero fee classes of the underlying CITs, and the CIT pays (and fully discloses in the fee table) an 18.5 bp “Management Fee” to the sub-adviser for managing those underlying CITs.
- With respect to fee disclosures for Great Gray CITs generally, we want to make the following additional factual clarifications and corrections:
- CITs are maintained by banks and not subject to mutual fund fee table disclosures, but as a matter of transparency and to give retirement plan sponsors and fiduciaries an ability to make an apples-to-apples comparison with mutual fund fees, Great Gray follows the disclosure principles embedded in the SEC mutual fund fee table requirements by disclosing in our CIT fee table the fees that the Great Gray CIT bears as an investor in underlying funds. In addition, Great Gray also discloses the fees in the Participation Agreements that retirement plan sponsors or fiduciaries must sign before they invest in the Great Gray CITs.
- Unfortunately, the author misunderstood the information we disclosed and then mischaracterized both the investments and fee disclosure of Great Gray’s CITs.
Statement from T. Rowe Price:
This article has several inaccuracies related to the pricing for collective investment trusts (CITs) in general and makes several false statements related to the pricing of T. Rowe Price’s target date strategies specifically. As a result, we respectfully request that you publish the corrections outlined below as immediately as possible.
First, the article falsely asserts that “the low-cost advantage of CIT TDFs is overstated when the costs of underlying funds are excluded.” On the contrary, the expense ratio for a CIT is an all-in fee and does account for expenses of the underlying components.
Second, at T. Rowe Price, this is the same pricing structure we use for our mutual funds. T. Rowe Price has mutual fund and CIT share classes that have zero fees that are used as building blocks for the target date series. We set a top-level fee for each target date strategy.
Third, the article also misleadingly and inaccurately compares the pricing of the T. Rowe Price Retirement Blend Select CIT with our T. Rowe Price Retirement Funds. These are two different series of target date portfolios, with different building blocks. The article incorrectly asserts that our mutual fund prospectus reports underlying fund fees of 40 basis points (our mutual fund prospectus does not list underlying fund fees, as those are zero, as described above). More so, the all-in fee of our T. Rowe Price Retirement Blend 2025 mutual fund starts at 22 basis points, while our T. Rowe Price Retirement 2025 mutual fund (a series with more active management) starts at 38 basis points. The numbers cited in the article are not aligned with either series.
As noted above, this damaging and misleading piece appears to be poorly researched, misconstruing publicly available information, and it contains an alarming number of errors. It has also caused significant confusion among readers who have reached out to us for explanations given the inconsistencies of what the piece claims and what they know to be true.
Ron Surz: Collective Investment Trusts that Report Zero Costs for Underlying Funds in Target Date Funds are Accurate
In response to the statements above, Surz provided the following comment to 401(k) Specialist:
“I was wrong. I apologize for questioning the validity of reporting zero fees for underling funds in collective investment trust (CIT) target date funds (TDFs). CIT are overtaking mutual funds in TDFs largely because their fees are lower. Fiduciaries should understand from where the cost savings originate. The low-cost advantage of CIT TDFs is real and that’s a good deal for the buyer.”
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.
