What Are Collective Investment Trusts (CITs)?

Collective Investment Trusts (CITs) have become an increasingly popular choice for retirement plans, but what exactly are they? At their core, CITs are pooled investment funds managed by banks or trust companies. These funds gather assets from various institutional investors, including 401(k) plans, pension plans, and other qualified retirement plans. The pooled resources are then invested in a diversified portfolio, which can include a range of assets such as stocks, bonds, or even other pooled funds.

One of the key reasons CITs have gained traction in recent years is their cost-effectiveness. Unlike mutual funds, which are widely available to the public and must comply with stringent regulatory requirements, CITs are exclusively offered to institutional investors. This restricted access reduces the regulatory burden, leading to lower operational costs. As a result, the fees associated with CITs tend to be lower than those of mutual funds, making them an attractive option for fiduciaries looking to manage costs without sacrificing performance.

"CITs (collective investment trusts) are tax-exempt, pooled investment vehicles that are administered by banks and trust companies. CITs are managed according to a defined investment objective and investment strategy, which can mirror an existing mutual fund."

Flexibility is another significant advantage of CITs. Because they are not subject to the same regulations as mutual funds, CITs can offer more tailored investment strategies. They can be customized to meet the specific needs of a retirement plan, whether that means focusing on particular asset classes, adhering to a unique investment philosophy, or adjusting allocations in response to market conditions. This level of customization is particularly appealing for large retirement plans that require a more personalized approach to their investment strategy.

However, CITs are not without their limitations. The most notable is their exclusivity; CITs are only available to institutional investors, meaning individual investors cannot access these funds directly. This restriction is both a strength and a limitation. While it allows CITs to operate with greater flexibility and lower costs, it also means that only those managing or participating in qualified retirement plans can benefit from these advantages.

Another aspect to consider is transparency. Because CITs are less regulated than mutual funds, they may not provide the same level of detailed reporting that plan sponsors are accustomed to with other investment vehicles. This can make it more challenging to evaluate the performance and risk profile of a CIT, particularly for smaller plans that may not have the resources to conduct in-depth analyses.

In summary, Collective Investment Trusts offer a cost-effective, flexible investment option for qualified retirement plans. Their lower fees and customizable strategies make them an appealing alternative to mutual funds, especially for large plans with specific investment needs. However, their exclusivity to institutional investors and the potential for reduced transparency are important factors to consider when evaluating CITs as part of a fiduciary strategy.

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References:

 [1] Putnam. (n.d.). What are CITs? | Collective Investment Trusts. Retrieved from https://www.putnam.com/dcio/how-we-invest/collective-investment-trusts/ 

 [2] Broadridge. (n.d.). Collective Investment Trusts. Retrieved from https://www.broadridge.com/cit/ 

 [3] University of Nebraska. (2022, October 20). Frequently asked questions about collective investment trusts (CITs). Retrieved from https://nebraska.edu/-/media/projects/unca/docs/benefits-help/vanguard-investments/10-20-22-collective-trusts-frequently-asked-questions.pdf 

 [4] Comerica. (2023, September 19). What is a CIT? Understanding Collective Investment Trusts. Retrieved from https://www.comerica.com/insights/personal-finance/What_is_a_CIT.html 

 [5] Neuberger Berman. (n.d.). Collective Investment Trusts: What You Need to Know. Retrieved from https://www.nb.com/documents/public/en-us/cits_what_you_need_to_know_brochure.pdf