One of the most visible structural changes in modern DC plans is the move from mutual funds to collective investment trusts. To participants, these options often look interchangeable—similar names, daily balances, familiar disclosures. But beneath the surface, the regulatory regimes governing them are fundamentally different.
Building on the fiduciary challenges explored in the previous post, this article examines why CITs have grown so rapidly, what protections differ from mutual funds, and whether this shift should be understood as cost‑effective optimization—or a subtler form of deregulation.
Chapter 4: CITs vs. Mutual Funds: Optimization or Functional Deregulation?
Shifting the Perimeter: What’s Happening in Today’s Retirement Marketplace
CITs vs. Mutual Funds: Same Portfolios, Different Regimes
What Is a CIT?
A collective investment trust (CIT) is a pooled investment vehicle maintained by a bank or trust company that commingles assets from multiple tax-qualified retirement plans and certain other institutional investors.
Key structural points:
- Bank-administered trust. CITs (often called collective investment funds or CIFs in banking regulations) are established and operated under banking laws and regulations, as well as relevant state banking rules, for state-chartered institutions.
- ERISA and tax-qualified focus. They are designed primarily for ERISA plans and other tax-qualified arrangements and are generally exempt from federal income tax under Internal Revenue Code section 584 if regulatory conditions are met.
- Not registered mutual funds. CITs typically rely on exemptions from registration under the Securities Act of 1933 and the Investment Company Act of 1940, meaning they are not “registered investment companies” in the mutual fund sense.
- Limited eligibility and access. Participation is generally restricted to eligible retirement plans and certain institutional accounts; they are not offered directly to the general retail public.
From a participant’s vantage point on a 401(k) website, a CIT can look almost identical to a mutual fund with the same strategy label, same benchmark, and same daily value on the statement. But the regulatory chassis underneath is fundamentally different.
Why CITs Have Grown in DC Plans?
Over the last decade, CITs have moved from niche to mainstream in defined contribution plans, particularly as the underlying vehicle for target-date funds. Several data points illustrate the shift. Morningstar data show that by mid-2024, CIT-based target-date series held just over half of all target-date assets (about 50.5%), up from roughly half that share a decade earlier.[1] Sway Research and industry coverage indicate that by early 2025, CIT target-date assets reached roughly $2.0 trillion, edging past mutual-fund-based TDFs at about $1.95 trillion, out of nearly $4 trillion in combined TDF assets.[2]
Why plan sponsors and consultants have moved in this direction - cost and fee compression. CITs generally avoid some of the distribution, marketing, and shareholder-servicing costs embedded in mutual funds (e.g., 12b-1 fees, certain transfer-agency and platform fees). They can pass some of those savings through in lower expense ratios. They can offer multiple unit classes with tailored pricing for large plans, accommodating different revenue and fee-level arrangements more flexibly than a single retail share class.
CITs also facilitate flexibility in design and implementation. CITs can be customized more easily than registered funds, allowing white-label structures, bespoke glide paths, or plan-specific overlays without launching a new mutual fund registration. They can incorporate changes (e.g., manager changes, benchmark adjustments) with fewer public filing frictions.
At least as importantly, CITs change the economics of recordkeepers and asset managers. Increasingly, recordkeepers are launching proprietary CIT “replicates” of popular institutional mutual funds. These structures allow recordkeepers to receive undisclosed asset-based compensation on investment products managed by third parties.
The result is that CITs have become the default institutional chassis for many DC investment strategies, particularly where scale and fee negotiation are paramount.
Key Differences in Protections and Transparency
CITs and mutual funds can hold the same underlying portfolio, often managed by the same firm. The difference lies in which regulatory framework applies and what that means for participant protections.
The contrasts can be grouped into several dimensions:
- Regulatory regime and primary overseer. Mutual funds are registered investment companies under the Investment Company Act of 1940 and overseen by the SEC, with detailed statutory requirements for structure, governance, disclosure, and shareholder rights. CITs are bank-maintained trust funds governed primarily by bank regulators (e.g., OCC under 12 CFR 9.18), state banking authorities, and ERISA/DOL rules for plan assets, with SEC involvement limited and indirect.
- Eligibility and distribution. Mutual funds are broadly available to retail investors; shares can typically be bought directly or through brokerage and retirement platforms. CITs are restricted to eligible retirement plans and certain institutional accounts; they cannot be marketed as retail products to the general public.
- Disclosure and data availability. Mutual funds must produce statutory prospectuses, Statements of Additional Information (SAIs), and annual/semiannual reports; these documents are filed with the SEC and are freely available on public databases. CITs do not file SEC prospectuses. Instead, they typically offer trust documents, participation agreements, and fact sheets directly to plan sponsors and participants. Disclosure to participants is mediated through ERISA and DOL rules—primarily the 404a-5 participant disclosure regime, which requires standardized fee and performance information for all designated investment alternatives, including CITs. Public third-party data on CITs (e.g., in retail fund databases and research tools) is improving but remains less comprehensive and less standardized than mutual fund data.
- Governance and investor rights. Mutual fund shareholders elect boards (with independent director requirements), receive proxy materials, and have voting rights on certain fundamental matters. CIT investors are beneficiaries of a bank-administered trust; governance is exercised by the trustee under trust documents and banking/ERISA fiduciary standards, not by participant-level voting.
- Valuation, pricing, and operations. Both CITs and mutual funds typically strike daily values and provide daily liquidity in DC platforms, but valuation, pricing, and operational controls for CITs are overseen through banking supervision and fiduciary obligations rather than through the mutual fund rulebook (e.g., 2a-5 valuation rules).
For plan participants, DOL’s 404a-5 regime narrows some of these gaps at the point of decision—fee tables, benchmarked performance, and website disclosures can look similar whether the option is a mutual fund or a CIT. But at the infrastructure level, the protections, rights, and enforcement mechanisms are not identical.
Case Example: Target Date Funds in CIT Form
Target date funds (TDFs) are the dominant default in 401(k) plans, making their choice of vehicle a powerful illustration of functional deregulation. Total TDF assets in the U.S. retirement market now exceed $3.8–4.7 trillion, depending on the source and cutoff date. Within that, CIT structures have gone from a minority share to more than half of target-date assets, recently surpassing their mutual fund cousins.
In practice, that means many default options labeled “2040 Retirement Fund” or “Target Retirement 2050” on a participant’s statement are now CIT-based rather than mutual-fund-based. The underlying asset allocation and manager may be identical (e.g., the same glide path implemented in a mutual fund and a CIT). However, the legal wrapper, primary regulator, disclosure regime, and investor rights are different.
From a fiduciary perspective, the question is not whether CIT-based TDFs are inherently better or worse—they often deliver real fee savings at scale—but whether committees fully appreciate the regime shift that has occurred beneath the label “target-date fund,” especially when these options are used as QDIAs for large participant populations.
Is This Deregulation or Optimization?
CIT adoption in DC plans can be told as either a success story or a deregulation story, depending on what you emphasize. Both narratives have truth to them.
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Optimization narrative (what the industry emphasizes) |
Deregulation narrative (what this paper is probing)
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This paper’s thesis is not that CITs are “bad.” In many cases, they are a sensible optimization within the existing rules. The concern is that, at scale, they are part of a broader pattern. Over time, cost and competitive pressures are pulling retirement assets away from the most stringent retail regimes and into alternative structures. That shift may be rational at the plan level. Still, it is, in effect, a soft form of deregulation for the end participant, who now depends more on fiduciaries and less on standardized product-level protections.
CITs, particularly in target-date form, are the clearest early example of that trend. The next sections examine how the same dynamics are now playing out across private equity, private credit, and other non-traditional exposures in DC plans.
CITs are not inherently problematic. In many cases, they deliver real benefits. But at scale, they illustrate a broader pattern: retirement assets steadily moving toward the edge of the regulatory perimeter. In the next post, we’ll examine how that same dynamic is playing out more aggressively as private equity and private credit move into DC plan defaults.
Want to read ahead? Download our full Beyond the Perimeter guide. (Free to download, no form to fill out)
[1] Morningstar. 2025 Target-Date Fund Investment Strategy
[2] Sway Research. State of the Target-Date Market: 2025
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