With the current state of the financial markets, worries over the coronavirus, and a heightened awareness by fund sponsors and investors about the cost of doing business, interest in Collective Investment Trusts (CITs) is growing and may lead to expanded adoption by asset managers.
A CIT is an investment vehicle that bears many similarities to a mutual fund, but is available only to qualified retirement plans, like a 401(k) or governmental plans that consist solely of retirement assets, pensions, profit sharing, stock bonuses or other tax-qualified retirement accounts and governmental plans exempt from federal income tax. CITs are sponsored by bank or trust companies under the supervision of the U.S. Office of the Comptroller of the Currency (OCC) or state banking regulators (as opposed to the Securities and Exchange Commission), and are institutional products sold only to plan sponsors or fiduciaries.
- CITs can be daily valued and traded on the National Securities Clearing Corporation (NSCC) platform.
- Offer a lower cost alternative to mutual funds for retirement plans.
- CITs do not have the same infrastructure requirements as mutual funds, so the break-even point for advisers may be substantially lower.
- They can have multiple classes with different expense ratios and management fees, and may also include a trail similar to a shareholder services fee.
- CITs introduce a fiduciary in the form of a trustee, and the adviser carries a fiduciary responsibility to the trust, rather than the plan.
- They are regulated investment structures overseen by the OCC, with interactions handled by the trust company, thus eliminating the burden on advisers.
- New CITs can be organized quickly with minimal expense, and trust companies can work with advisers to set up a new account in 30-60 days.
These benefits, along with increasing awareness and acceptance of CITs, are prompting many advisers to explore whether now might be the right time to introduce a collective fund. For large asset managers, there is an overwhelming drive to become structure agnostic, so they have the ability to deliver their strategy in whatever vehicle an end client wants¹.
For those with distribution aspirations in the retirement space, a CIT is vital. Many boutique advisers who may or may not have pooled products today, likely already have relationships with companies, consultants, and referral sources, such as attorneys and CPAs, that offer or provide services to ERISA plans – making the CIT an efficient entry point.
Increased Distribution Opportunities with 403(b) Plans
As mentioned above, the current distribution landscape is broadly defined as ERISA plans. Below is a helpful chart that outlines eligible and non-eligible plans for CITs:
Retirement 403(b) plans are qualified, tax-advantaged plans offered by employers to employees. But they are only offered to employees of non-profit and government organizations. The major difference between a 401(k) and a 403(b) is the latter is exempt from nondiscrimination testing. Non-profits are currently unable to offer CITs to their participants.
But in March 2020, a bill was introduced in Congress to allow CITs into 403(b) plans, referencing the significant cost savings and potential impact on compound interest in comparison to current investment options. Importantly, the congressman who introduced the bill represents the California State Teachers’ Retirement System (CalSTRS), which has more than 960,000 public school educators in their CalSTRS 403(b) retirement plan².
Opening CITs up to 403(b) plans would broaden the marketplace and provide even more distribution opportunities for advisers with constituents receptive to the cost-saving benefits allotted by the structure.
One of the drawbacks for investors with CITs over the years has been a lack of transparency because disclosure requirements and performance reporting are more limited than with mutual funds. But many CIT sponsors found a way to push out information via fact sheets and websites. Most prices are reported daily and Morningstar does offer CIT peer group comparisons with each other and with mutual funds.
The NFN has been working to expand CIT coverage to provide more transparency. The network is responsible for aggregating critical data for investible products including daily performance, net asset value (NAV), strategy-level reference data, valuation, and for assigning tickers so products can be searched. By allowing CITs to be analyzed with the same criteria available to mutual funds and other products, the NFN estimates that more than 300 CITs have current data available on the platform³. It’s estimated that NFN may add many additional CIT funds to be analyzed over the next six months.
This increased CIT transparency has not been without questions regarding whether NFN inclusion violates marketing restrictions inherent to the structure. In a whitepaper published recently by the global multinational law firm of Eversheds Sutherland, applicable CIT regulations and other factors were examined, including no-action letters from the SEC.
The law firm found the following: “We are of the view that there are sound arguments that demonstrate that the availability of CIT tickers on NASDAQ and the production of fact sheets will not run contrary to SEC staff views. There are no specific prohibitions on (1) the use of tickers for CITs; or (2) the preparation of fact sheets in respect of CITs.”4
With the potential for widespread adoption and the considerable benefits of CITs in the current market, advisers and asset managers should consider whether offering strategies with this vehicle would present new distribution opportunities and greater flexibility for their investors, particularly regarding retirement plans.
Ultimus currently supports many CITs by offering a complete turnkey solution for investment managers that includes administration, accounting, custody, transfer agent, and a trusteeship via partner trust companies. Click here to learn more or send an email with your questions to firstname.lastname@example.org.
4Eversheds Sutherland (2020). Collective Investment Trusts on the Nasdaq Fund Network [White paper]. Retrieved March 20, 2020, from Nasdaq Funds Network: https://www.nasdaq.com/docs/2020/02/13/Nasdaq%20-%20CIT%20Whitepaper_Final.pdf