CITs’ Lower Fees Seen as an Advantage Over Mutual Funds

CITs are slowing making inroads into retirement plans, and most experts say lower fees besides other advantages CITs offer, will spur more adoption.

By Lee Barney | February 08, 2017
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Collective investment trusts (CITs) can cost 10 to 30 basis points (bps) less than mutual funds, according to a DST Systems Inc. white paper, “Collective Investment Trusts—A Perfect Storm.” 

And even a half a basis point to 2 basis points can be reason enough for a plan sponsor to switch from a mutual fund to a CIT, according to DST. In fact, the firm projects that CIT assets in retirement plans could rise from their $1.9 trillion total at the end of 2015 to $3.1 trillion by the end of 2018—a 63% increase.

Most experts that PLANSPONSOR spoke with agree that, because of their lower costs, CITs are slowing making inroads into retirement plans. A survey from Callan found nearly two-thirds of defined contribution (DC) plans offered CITs in 2016, up from 48% in 2012. Meanwhile, mutual funds decreased in prevalence from 92% to 84% over that same period.

However, Joel Lieb, director of defined contribution advisory at SEI Institutional in Oaks, Pennsylvania, says, with the exception of plans with $1 billion or more in assets, the plans that SEI advises as a 3(38) fiduciary all have mutual funds as their core menu. Unlike DST, Lieb maintains that the cost advantages of CITs over mutual funds are only around 5 bps, down from around 10 bps eight to 10 years ago.

Likewise, SunTrust Institutional Investments of Atlanta has not witnessed considerable movement by plan sponsors to embrace CITs, says Philip Pounds, director of client experience at the firm. Instead, SunTrust’s clients are primarily embracing the retirement and institutional share classes that mutual funds increasingly offer, he says. In fact, Pounds says, “four to five years ago CITs looked like they might take off,” but the mutual fund industry ingeniously countered by offering zero revenue share and institutional share classes.

On the other hand, “there has been a strong trend among the large plans that Aon Hewitt serves to welcome CITs,” says Win Evens, director of human resource outsourcing (HRO) investment solutions, in Chicago. “With the power of compounding, eliminating fees from 100 basis points to 75 basis points can have a profound impact over a person’s career,” he says.

In addition, whereas the early CITs did not offer daily valuation, modern CITs do, and “they are well-supported by the recordkeeping industry these days,” Evens says. As DST notes, in 2000, the National Securities Clearing Corp. added CITs to its mutual fund trading platform, making it possible for the vast majority of CITs to trade and price daily.

NEXT: Other benefits of CITs