Changes in Technology, Regulation and Accessibility Drive Rise in Use of Collective Investment Trust

Collective Investment Trusts (CITs) have been gaining momentum in the retirement space, and for good reason. Jason Colarossi, vice president, national retirement strategist, of Franklin Templeton’s Defined Contribution Division, outlines what CITs are and how they have evolved. He also discusses the different types of strategies and the growth we have seen with this investment vehicle recently.

What’s a Collective Investment Trust (CIT)?

CITs are tax-exempt, pooled investment vehicles sponsored and maintained by a bank or trust company which also serves as the trustee. Typically available only to qualified retirement plans, CITs combine assets from eligible investors into a single investment portfolio (or “fund”) with a specific investment strategy. By commingling, or pooling, assets, sponsors of CITs may take advantage of economies of scale to offer lower overall expenses. The sponsoring trustee provides an additional level of risk management, and today’s CITs offer more innovative investment opportunities than in the past.

Also known as collective investment funds, these vehicles have gained in popularity within the defined contribution (DC) space—which includes 401(k) plans—in recent years.

While sharing some characteristics of mutual funds, unlike mutual funds, neither the Securities and Exchange Commission (SEC) nor the Investment Company Act of 1940 regulate CITs. However, CITs are subject to supervision and regulation by the Office of the Comptroller of the Currency or similar state banking regulator. To the extent Employee Retirement Income Security Act of 1974 (ERISA) plan assets are invested, CITs are subject to ERISA regulations. As such, the CIT trustee is held to and managed to comply with the fiduciary standards of ERISA.

CITs: Then and Now

CITs have been around as an investment vehicle since the 1920s, but the early adopters were mainly defined benefit (DB) plans, which offer a fixed, pre-established benefit for employees at retirement. CITs were predominantly used in these plans to deliver stable value or passive strategies. However, certain features made them less attractive to a broader audience of investors, such as manual investor transactions, limited performance data availability and infrequent valuations.