Collective Investment Trusts: To Trust or Not to Trust?

The pros and cons of CITs

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Scott Holsopple

If you’ve even heard of a Collective Investment Trust (CIT), you’re ahead of most investors. Yet this investing vehicle, which has been around for decades, is gaining new steam.

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CITs on the move

The newest retirement industry regulations, which should take effect in the second quarter of 2012, require increased fee transparency for employer-sponsored plans. That means you’ll soon have access to more information about the fees and expenses associated with your plan—and so will your employer. With the new transparency, some plan sponsors will probably start looking for lower-cost investment options, and CITs may fit the bill.

If a CIT is coming to a plan near you, you need to know what it is.

What’s a CIT?

On the surface, CITs look similar to mutual funds, but the differences are in the details.

Like mutual funds, CITs are pooled investing tools. However, each CIT is exclusively managed for one retirement plan. They’re only available as an investment option within some employer-sponsored retirement plans.

A money manager whose functions are similar to those of a mutual fund manager can oversee a CIT; in some cases, mutual fund managers also oversee CITs. Or a CIT may simply be invested in mutual funds and/or exchange-traded funds that fit the stated goals.

Unlike mutual funds and other publicly traded securities, CITs aren’t regulated by the Securities and Exchange Commission. As a result, they are not legally required to provide monthly performance statistics, prospectuses, or other investment details. Instead, since they’re exclusively managed by banks and trust companies, they are subject to banking regulations enforced by the Office of the Comptroller of Currency, which is part of the U.S. Treasury. CITs must usually be valued quarterly, but there is an exception for trusts that contain less-liquid assets, like real estate (those can be valued annually).

Should you contribute to a CIT? As with every investment product, there are advantages and disadvantages. Each investor’s unique situation will dictate which investments are appropriate.

Researching CITs can be tricky. There’s little information available about them for several reasons:

  • Lack of SEC regulation means very little information is required.
  • Smaller numbers of participants in each CIT means less demand for statistics.
  • Sometimes they have a short track record (or at least a record that’s difficult to track).
  • There can be a lack of information about the money manger’s history unless the CIT is managed by a mutual fund manager.
  • Further, knowing whether a CIT is investing according to its stated objectives is difficult, in part because relatively few CITs are monitored by analytical companies. Morningstar does track some CITs, though.

    Another disadvantage is that CIT monies are accessed differently. For example, if you leave your employer, a traditional rollover is not possible. For this reason, speak with your tax consultant about any CIT investment.

    On the other hand, costs are low, and that is an enormous advantage. High fees and expenses can quickly eat investing gains. CITs don’t generally have redemption fees, and they’re able to offer low expenses because they have relatively low overhead. They have:

    • Lower compliance costs since they don’t have to deal with the SEC.
    • Lower marketing costs since they aren’t publicly traded.
    • Lower administrative costs since there are fewer recordkeeping requirements.
    • If your company offers CITs, do some research and analysis. Remember, just because less reporting is required doesn’t mean your CIT hasn’t made it available. Ask your plan administrator where to begin looking.

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      Only consider investing in a CIT if you have: (1) ensured that the money manager has a good track record and has invested according to the stated goals of the CIT, (2) looked at the quality of the CIT’s investments and its short-term and long-term track record relative to mutual funds and indexes in similar categories, and (3) ascertained a steady performance history for other CITs provided by the same bank or trust company.

      Investing research and analysis can take a long time. If you have questions about where a CIT might fit into your retirement investing portfolio, it could be beneficial to speak with a retirement adviser.

      Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal. Keep tabs on Scott on Twitter and Facebook.