A Collective Investment Trust (CIT) is a type of tax-exempt, pooled investment vehicle offered for Employee Retirement Income Security Act of 1974 (ERISA) contribution plans and other types of government retirement plans. They are available only to defined contribution and defined benefit plans, which means IRAs and other types of retirement vehicles are not able to offer CITs to investors.
While CITs and mutual funds share many similarities, there are some key differences that investors will want to understand before selecting a fund. Understanding how the funds differ would help to explain their role in retirement planning.
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Getting to Know CITs
The reach of CITs is expanding. In March 2020, a bill was introduced to Congress to allow 403b retirement plans to offer CITs. If passed, this addition would broaden the market for CITs and give investors and advisors significantly more investment options.
Investment choices for CITs are the same as the choices for traditional mutual funds. CITs can invest in the same type of financial instruments and assets, including stocks, bonds, REITs, ETFs, derivatives, and more. Typically, CITs combine assets into one large investment pool that has a specific investment strategy. In this sense, CITs act much like target-date mutual funds.
CITs have become popular investment choices over mutual funds in recent years. From 2011 to 2018, CITs saw assets grow by 64% from $1.87 trillion to $3.07 trillion. CITs’ share of 401k assets climbed to 28% while mutual funds saw a decline to 48% of total 401k assets. For 2019, CITs were reported to have $69 billion in net inflows, representing organic growth of 10%.
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The Benefits of CITs Compared to Traditional Mutual Funds
CITs break down their fee structure in a way that traditional mutual funds do not. This also benefits advisors who often have a lower break-even point due to less overhead costs within the fund. Because CITs only need to meet regulations regarding retirement accounts, they have lower marketing expenses and distribution fees. But investors should check to make sure the fee structure works for the intended investment objective. CIT fees vary and may include custodial fees, advisor fees, transactional fees, and trustee fees. Overall, though, fees for a CIT tend to be 20 to 25 basis points lower than those found in traditional mutual funds.
CITs have also been shown to generate better risk-adjusted returns compared to similar types of mutual funds. Some of this can be attributed to lower fees that translate to greater returns for investors. Additionally, the structure of CITs means having more portfolio managers involved at each level, giving investors an overall advantage over traditional mutual funds.
Transparency has been one of the biggest negatives for CITs compared to mutual funds but that is beginning to change with CIT ticker symbols now appearing. Even still, many investors are unfamiliar with CITs; despite the trend toward transparency, there is still more information on mutual funds available to investors.
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Choosing Between a CIT and a Mutual Fund
The lower fee structure is one of the biggest selling points for a CIT compared to traditional mutual funds. That means, compared to similar mutual funds, investors will see a greater profit from CITs simply due to a reduction in fee expenses.
However, transparency and the lack of advertising still affect the CIT industry. Many investors might not want to invest in a product they are unfamiliar with nor do they want to entrust their retirement money to a fund that isn’t as transparent as a traditional mutual fund. Until CITs offer something similar to the prospectus offered by mutual funds, many investors might not feel comfortable investing in CITs.
The Bottom Line
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