Growth in CIT Use Driven By Familiar Market Factors

Despite a 75-year track record as an investment vehicle, some plan sponsors lack awareness of collective investment trusts and their reputation for low fees.

By John Manganaro | March 30, 2015
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As explained by Gary Kleinschmidt, head of DCIO sales at Legg Mason, collective investment trusts are an increasingly popular investment vehicle available to institutional investors—namely defined contribution and defined benefit retirement plans.

He tells PLANSPONSOR there is relatively little user-facing difference between a mutual fund and a collective investment trust (CIT), especially from the ground-level perspective of the plan participant. Today the CIT structure is increasingly deployed in defined contribution plans with a target-date fund (TDF) overlay—often in an open-architecture approach giving plan sponsors a means of creating custom glide paths for their participant population at an affordable price.

“A CIT is created as an investment option for a plan through a standard trust contract signed by the plan sponsor and the trust company,” he explains. “Importantly, CITs are supervised by banking regulators, rather than the Securities and Exchange Commission (SEC) and other federal financial market oversight agencies. It’s not a difficult process compared with mutual funds—at this point, most or probably all recordkeepers are very familiar with the process and have the capability to bring this into a plan.”

One other important distinguishing factor is that CIT return results are not reported or tracked the same way as mutual funds, Kleinschmidt says, but this difference has diminished greatly with expanded use of digital reporting technology.

“The criticism often is that you can’t find a ticker symbol for a CIT in the newspaper—instead you have a CUSIP number that is harder to access,” he notes. “But with modern technology and the Internet and the exposure we have to live data, CITs have achieved the daily transmission and transparency that plan sponsors demand. Today you can get the same type of daily close for a CIT that you can get on a mutual fund.”

Kleinschmidt adds that most recordkeeping platforms “now have their own internal databases anyway for mutual funds—you log into your platform and get the information that way. So that pressure is going away and it’s also contributing to the tailwinds for CITs. It’s related to the greater attention that is being paid to exchange-traded funds (ETFs). That structure has benefitted from technology advances as well.”