Jeff Hemker, Betsy WarrickMuch has been made of the potential for high fees within a
retirement plan—most often driven by the investment options selected for the
fund lineup. Many advisers might not be aware of the opportunity for defined
contribution [DC] plans [along with defined benefit [DB] plans] to invest in an
option that is built exclusively for retirement plan assets and generally comes
with lower fees than most retail share classes. Traditionally, these collective
investment trusts [CITs] were only available at the large end of the market,
but they are now available much more widely, and for smaller plans. PLANADVISER
spoke with Jeff Hemker, national sales manager in the retirement division at
Invesco, and Betsy Warrick, senior vice president at Invesco Trust Company,
about the availability and benefits of these investment options.
PA: Who can use CITs?
Betsy Warrick: Collective investment trusts are designed
exclusively for qualified retirement plans, so what you get with that is a
group of “like” investors with shared goals. With qualified retirement plans,
one of the key elements is that all the assets are ERISA [Employee Retirement
Income Security Act] assets, or they are government or church group retirement
plan assets governed by Internal Revenue Code [IRC] provisions very similar to
ERISA. CITs are available only through banks and trust companies. While the SEC
[Securities and Exchange Commission] is not as involved in regulating CITs as
mutual funds, CITs are subject to a high degree of regulatory oversight. The
primary regulators are banking regulators, either the Office of the Comptroller
of the Currency [OCC], or state banking examiners. They conduct frequent
examinations of the banks subject to their regulation. CIT sponsors are visited
much more frequently by bank examiners than mutual fund sponsors are visited by
the SEC or FINRA [Financial Industry Regulatory Authority]. Also, what may not
be as well-known is that CITs are subject to regulations issued by the DOL
[Department of Labor], the IRS [Internal Revenue Service], the SEC and FINRA,
to the extent that CITs are marketed by a broker/dealer [B/D].
PA: How do you compare these to mutual funds and/or separate
accounts—what do plan sponsors and plan advisers really need to consider?
Warrick: There are a few highlights. Obviously, separate
accounts offer the most flexibility concerning the investment strategy, since a
plan sponsor and investment manager can create it on a completely customized
basis. CITs have flexible pricing like a separate account, whereas mutual
funds, while they offer different share classes, don’t have the same type of
flexibility to, as an example, customize for a certain recordkeeping platform
or a large consultant relationship. CITs generally have lower operating
expenses than mutual funds, and since they represent unit ownership to the plan
custodian, they are simpler to administer than stock or bond separate accounts.
CITs are typically daily valued and daily priced, just like a mutual fund. Most
CITs support daily transaction activity by plan participants, and that activity
is unitized, similar to mutual fund shares. Separate accounts may not be daily
valued or daily priced, and may not be unitized. Also, most CITs and mutual
funds are traded on the industry standard platform via the NSCC [National
Securities Clearing Corporation]. Separate accounts are typically not traded
via the NSCC. Then again, CITs and mutual funds generally have internet access to
information about the products; separate accounts may not have the same type of
web reporting or capabilities there. Separate accounts and CITs are similar in
that they are ERISA plan assets, so the banks and investment advisers that
provide investment management services are subject to an ERISA fiduciary
standard. Mutual funds and their managers are not subject to an ERISA fiduciary
standard in their management of the fund assets.
Jeff Hemker: Key now is the internet reporting, the ability
of CITs to have daily pricing, and NSCC clearing and trading. Those are the
things that historically have been problems. CITs function so much like a
mutual fund at this point in time that the comparison is very similar, whereas
10 or 20 years ago, that certainly wasn’t the case.
PA: Where are you seeing the most growth, and specifically
why is demand growing?
Hemker: The most growth you’re seeing at this point would be
in larger plans—$50 million and up—but it’s all coming downmarket, and if
you’ve been in the industry for any period of time, anything that takes place
in a larger market eventually makes its way down. CITs used to be available
only in special situations—in many cases only at certain recordkeepers. Now the
majority of recordkeepers do trade them and have them available.
The problem was the advent of the R6 share, which really
slowed the growth of CITs. But now all the major recordkeeping platforms have
them available. They don’t actually promote them as much as some of the other
products out there. What you’ll find is that CITs are available on more
platforms in smaller marketplaces. And with the DOL’s fiduciary rule, I think
adoption will expand on a much greater basis over the next three to five years.
Warrick: The DOL fiduciary rule has put a lot—or is going to
put a lot—of pressure on the industry, particularly in regard to the mutual
fund share class structure and how advisers are compensated. Firms that
recommend investment options to plan sponsors may find that CITs and their
customizable share classes help reduce the conflicts of interest the DOL rule
and the BIC [best interest contract] exemption are designed to address.
Besides the DOL, there is a lot of other heat on plan
sponsors and brokers who sell products to ERISA plans. FINRA continues to provide
guidance to broker firms and conduct sweeps, investigations and disciplinary
actions concerning improper share class sales; failure to apply breakpoints and
waivers; and failure to identify share class eligibility issues. On the
courthouse side of the street, class action lawsuits continue to be filed on
behalf of plans and their participants. What we have seen with some of these
lawsuits is that the plaintiff’s counsel alleges breach of fiduciary duty. So
when you look at CITs and the share classes that are generally available, plan
sponsors and their advisers may find that they reduce fiduciary conflict issues
by offering slimmer share classes.
PA: So, with the share classes in mind, are fees and fund
expenses lower for CITs?
Warrick: Yes, oftentimes they are. The actual pooling of the
assets typically allows for lower compliance, administration, marketing and
distribution costs; those cost savings are then passed on to plan sponsors and
their participants. Since all of the assets are qualified retirement assets,
the investors tend to be long-term investors. This causes CITs to generally
have more consistent flows, without the large swings that can affect their
retail mutual fund counterparts, which also results in lower trading costs.
PA: What barriers are you seeing to more plans’ fiduciaries
selecting CITs for their plan lineups? Why aren’t they being implemented at
Hemker: I think the biggest challenge is the lack of
understanding by advisers and plan sponsors. When you say “CIT,” it sounds
foreign to them, and I think the plan sponsor’s fear is that they don’t
understand CITs and that their participants don’t understand them. Therefore,
it’s easier just to go with the straightforward mutual fund, which provides a
prospectus people are familiar with and is a more familiar format. There’s a
feeling that mutual funds, because of how they’re regulated by the SEC, may be
safer for the individual investor. CITs offer fact sheets just as informative
as those provided by mutual funds, because we all know that very few investors
read prospectuses. Ultimately, I think it goes back to that issue of CITs being
unregulated that is confusing and frightening to people because they don’t
understand it. As we discussed earlier, the regulatory blanket over CITs is
PA: What haven’t we covered yet as far as fee structure
Warrick: In terms of that flexibility, CITs offer flexible
revenue-sharing and non-revenue-sharing share classes. It’s important to know
that in certain cases there are plans that need to be able to pay, in terms of
the recordkeeping fees, those charges through revenue sharing.
Many CITs also offer a tiered fee structure so that, as
assets grow in a particular plan, discounted fees can be passed on to the plan and
its participants. There are still myths out there about collective investment
trusts having deficiencies—such as inefficiencies for trading—so it’s important
to reiterate that these investments have very efficient share classes, or what
we call net share classes in terms of trading, and so forth. Of course, brokerage
firms need to take these CIT compensation issues into account when they are conducting
their DOL rule compliance considerations, as they also review mutual fund
Hemker: Any time investment option fees are a major issue in
what you’re trying to do, and you want active management, I think the CIT
solution usually will be the best you’ll find, whether or not you want to
factor in revenue sharing or 12b-1 type fees.
PA: How can plan advisers then help encourage plan sponsors consider
that option? What’s the role of plan sponsors in spreading the gospel of CITs?
Warrick: It’s education, education, education. Invesco is
offering an upcoming webinar on CITs in November geared toward plan advisers,
and our wholesalers are on the road speaking with advisers about CITs,
including their capabilities and benefits.
Hemker: If I were a plan adviser, I’d look at this as an
opportunity to really show my value to my clients and my prospects because I can
bring them something that will help them overall in structuring and building
their 401(k) plan. It can provide a similar investment performance I’d get in
any mutual fund or separate account in the same strategy, but at a lower cost
than the mutual fund generally offers.
The spread of CITs will really come through advisers. When advisers
embrace them, the industry will begin seeing the faster or larger growth we
would expect, based on all the advantages a CIT can offer.
All material presented is compiled from sources believed to
be reliable and current, but accuracy cannot be guaranteed. This is not to be
construed as an offer to buy or sell any financial instruments and should not
be relied upon as the sole factor in an investment making decision. As with all
investments there are associated inherent risks. Please obtain and review all
financial material carefully before investing. This does not constitute a
recommendation of the suitability of any investment strategy for a particular
The opinions expressed are those of the authors, are based
on current market conditions and are subject to change without notice. These
opinions may differ from those of other Invesco investment professionals.