CIT Growth Continues With Adviser Backing

In recent years, there has been a noticeable shift in the retirement plan industry, as more plan sponsors incorporate collective investment trusts into their investment offerings. Although CITs have existed for decades, their adoption is accelerating, particularly as cost-conscious plan sponsors seek alternatives to traditional mutual funds.

Industry experts note that the cost-saving potential of CITs, along with their growing availability and ease of use, are driving this trend. Chuck Williams, managing partner in and CEO of Finspire LLC, highlights that CITs, once primarily available to larger retirement plans, are now more common across a range of sizes.

“70% of our clients will have some CIT in there,” he says. “A couple of years ago, it was mostly larger [plans], but now we’re seeing smaller plans incorporating them as well.”

Jessica Ballin, an investment adviser representative and principal in 401k Plan Professionals, echoes these sentiments, stating that CITs are now discussed across the board. Ballin explains that some CITs offer as much as 30% in cost savings, compared with mutual funds, making them an attractive option for plan sponsors looking to minimize expenses without sacrificing performance.

“There’s always some funds that we love and use on a regular basis, and they screen very well,” she says. “If a CIT offers a 30% cost savings, it makes sense to utilize it.”

Challenges to Adoption

Michael Gheen, vice president and director of retirement plan services at Oswald Financial Inc., further emphasizes the importance of cost structure when evaluating CITs.

“Depending on the plan size, CITs can be [at least] five basis points … less expensive than mutual funds,” Gheen notes. “We will definitely bring that to the committee’s attention and have a discussion around it.”

However, he also acknowledges that the decision to switch to a CIT from a mutual fund is not always straightforward. He might not use a CIT structure or entertain the idea if the cost savings are minimal, for example, citing situations in which savings might only be 2 to 3%, not warranting a change.

Despite the advantages CITs offer, one challenge in broader adoption is educating plan sponsors about how CITs work, Gheen adds. Mutual funds are a familiar product for most sponsors, but CITs are less known outside of the financial industry, despite their similarities to mutual funds in terms of structure and operation.

“Especially in the smaller end of the market, plan sponsors don’t understand what CITs are,” Gheen says. “It’s a real learning curve.”

Williams adds that part of the responsibility lies with advisers and plan sponsors to broaden their conversations with clients about investment options. Many plan sponsors are already having these conversations, and CITs should be included alongside stable value and money market funds to ensure plan participants are aware of all options available to them.

Opportunities and Obstacles

One of the barriers to CIT adoption in the past has been the administrative complexity required. However, Gheen notes that over the past few years, these processes have become much more efficient, reducing the burden on plan sponsors. As the administrative burden has lessened, the opportunities to incorporate CITs have continued to grow. Ballin points out that even in the last two years, the availability of CITs has expanded significantly.

But even as the CIT market is expanding, the future of retirement plan regulations and the potential for legislative changes remain uncertain. Gary Gensler, chairman of the Securities and Exchange Commission, has mentioned the potential for heightened regulation of CITs, which are currently overseen by the Office of the Comptroller of the Currency.

In a PLANADVISER webinar held on September 24, Tom Demko, managing director at SageView Advisory Group, said he is more worried about the increasing threat of plan litigation than about scrutiny from regulators.

In recent years, certain law firms have been filing what Demko describes as “cut and paste” lawsuits, often based on allegations that improper fees were charged by recordkeepers or investors were in the wrong share class.

Demko believes this trend will continue: “As CITs become more and more prevalent, they’re going to, of course, attract more of that kind of litigation.”