While mutual funds have long been the gold standard for retirement plans, a quiet shift is happening in the industry. Collective Investment Trusts (CITs) are rapidly gaining ground, challenging the dominance of mutual funds in 401(k) lineups. In fact, as of June 2024, CITs have officially overtaken mutual funds in the target-date market, holding 50.5% of assets compared to 49.5% for mutual funds.
Why the sudden surge? For plan sponsors and fiduciaries, the appeal lies in lower costs, greater flexibility, and an institutional approach to investing. But for many, CITs remain a black box—a financial vehicle wrapped in regulatory complexity and banking jargon.
This guide demystifies CITs, exploring how they work, why they’re winning over plan sponsors, and what you need to know before making the switch.
What is a Collective Investment Trust (CIT)?
A Collective Investment Trust (CIT) is a tax-exempt, pooled investment vehicle maintained by a bank or trust company. Like a mutual fund, it commingles assets from various investors—in this case, exclusively qualified retirement plans—into a single portfolio managed by professional investment managers.
However, unlike mutual funds, CITs are not available to the general retail public. You cannot buy a CIT in your personal brokerage account. They are designed specifically for qualified retirement plans, such as 401(k)s, defined benefit plans, and certain government plans.
How CITs are regulated
The regulatory framework for CITs is distinct from mutual funds, which is a key driver of their cost efficiency.
- Primary Regulator: The Office of the Comptroller of the Currency (OCC) regulates CITs offered by national banks, while state banking authorities oversee those offered by state-chartered banks.
- ERISA & DOL: Because CITs hold retirement plan assets, they are subject to the Employee Retirement Income Security Act (ERISA). The Department of Labor (DOL) provides oversight, and the bank trustee acts as an ERISA fiduciary, meaning they must act solely in the best interest of plan participants.
- SEC Exemption: Critically, CITs are exempt from registration with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940. This exemption saves them from the costly registration fees, prospectus preparation, and board governance requirements that mutual funds face.
CITs vs. Mutual Funds: Key Differences
While they share the same goal—growing retirement assets through professional management—the structural differences between CITs and mutual funds have significant implications for cost and transparency.
1. Cost Structure and Fees
The most compelling argument for CITs is price. Because they avoid the administrative burden of SEC registration and the marketing costs associated with retail mutual funds (like 12b-1 fees), CITs typically operate with lower expense ratios.
- Negotiable Fees: Unlike mutual funds, which have a set expense ratio for all investors in a specific share class, CIT fees can sometimes be negotiated based on the size of the plan’s assets.
- No Retail Markup: Mutual funds often bundle marketing and distribution costs into their fees. CITs, being institutional products, strip these out, passing the savings directly to plan participants.
2. Transparency and Reporting
Mutual funds are required by the SEC to publish a prospectus and detailed quarterly reports accessible to the public. CITs, exempt from these rules, have historically been criticized for being less transparent.
- Reporting: CITs do not produce a prospectus. Instead, they operate under a “Declaration of Trust” and provide periodic reports to the plan sponsor.
- Ticker Symbols: Historically, CITs lacked ticker symbols, making them hard to track on public financial websites. However, this is changing. In 2019, Nasdaq and Wilmington Trust launched the Nasdaq Fund Network for CITs, allowing them to register searchable tickers, significantly bridging the visibility gap.
3. Availability
Mutual funds are democratic; anyone with a brokerage account can invest. CITs are exclusive. They are available only to:
- 401(k) plans
- Defined benefit plans
- 457(b) governmental plans
- Target benefit plans
Note: Currently, 403(b) plans (used by non-profits and public schools) generally cannot invest in CITs, though bipartisan legislation like the “Retirement Fairness for Charities and Educational Institutions Act” has been introduced to change this.
The Advantages of Adopting CITs
The shift toward CITs isn’t just about saving a few basis points; it’s about fiduciary responsibility and operational efficiency.
Lower Expenses for Participants
In an era where plan sponsors are frequently sued for excessive 401(k) fees, moving to a lower-cost vehicle is a strong fiduciary defense. By switching to CITs, sponsors can potentially reduce investment management fees by 10 to 30 basis points. Over a participant’s career, this compounding saving can significantly boost retirement outcomes.
Investment Flexibility
CITs are not constrained by the liquidity rules that govern mutual funds. The SEC requires mutual funds to maintain a high level of liquidity to meet potential daily redemptions from retail investors. CITs, serving long-term retirement plans with predictable cash flows, can invest in less liquid, potentially higher-yielding assets like private equity, real estate, or stable value funds without the same regulatory handcuffs.
Fiduciary Oversight
When a plan sponsor selects a CIT, the bank trustee assumes investment fiduciary responsibility for the management of the portfolio. While the plan sponsor still retains the duty to select and monitor the CIT provider, the bank’s role as a co-fiduciary adds an extra layer of governance and protection.
Operational Considerations for Plan Sponsors
Transitioning to CITs is not as simple as flipping a switch. It requires due diligence and an understanding of the operational nuances.
Valuation and Trading
Unlike mutual funds, which are valued daily and can be traded on any open market day, some older or less liquid CITs traditionally had less frequent valuation (e.g., monthly). However, modern CITs largely match mutual funds with daily valuation and trading capabilities via the National Securities Clearing Corporation (NSCC), making the participant experience seamless.
The “Written Plan” Requirement
According to OCC Regulation 9.18, every CIT must be established and maintained under a formal written plan. This document is the CIT’s constitution—it outlines investment policies, fee structures, valuation methods, and withdrawal terms. Plan sponsors must review this document carefully, as it replaces the prospectus found in the mutual fund world.
Audit Requirements
CITs are subject to an annual audit requirement. The bank maintains this audit, and while it isn’t filed with the SEC, it must be made available to plan sponsors. Reviewing the audited financial statements is a critical step in the ongoing monitoring of a CIT investment.
Trends in Adoption
The data is clear: CITs are winning.
- Target-Date Dominance: As mentioned, CITs now hold over 50% of the target-date fund market, a staple in default investment options for 401(k) plans.
- Growth in AUM: Total assets in CITs have grown to an estimated $7 trillion, driven largely by adoption in large-plan markets.
- Down-Market Move: While originally the domain of mega-plans with billions in assets, CIT providers are increasingly offering share classes with lower minimums, making CITs accessible to small and mid-sized businesses.
Are CITs Right for Your Plan?
While the benefits are clear, CITs are not a universal solution. Smaller plans may not meet the minimum asset requirements for the most competitive CIT share classes. Additionally, the lack of public data can make it harder for participants to track their investments on third-party finance apps, potentially causing confusion.
However, for fiduciaries focused on optimizing participant outcomes, the cost savings and institutional rigor of CITs make them a contender that can no longer be ignored.
