Recent retirement plan litigation continues to be focused on retirement plan costs. One of the simpler allegations in those cases is that plan sponsors used more expensive, retail versions of investment products that could be purchased in institutional share class form with lower fees.
As these cases have evolved, plaintiffs’ attorneys have expanded the share class argument to include collective investment trusts, which frequently replicate mutual fund investment strategies available in the market.
A Collective Investment Trust (CIT) is a type of investment vehicle that pools money from multiple investors to invest in a variety of securities. CITs are similar to mutual funds but are only available to qualified retirement plans, such as 401(k)s, pension plans, and hopefully sometime soon, 403(b) plans, and not to individual investors. Trust companies or banks often sponsor CITs, and they are typically governed by a board of trustees and have their own offering documents.
At the highest level, the objectives of mutual funds and CITs are the same, to pool money to invest and return proceeds to investors. However, CITs are not registered with the SEC. They are regulated under the Office of the Comptroller of the Currency (OCC) or other regulatory agencies, which means they are subject to very different rules and regulations than mutual funds.
It is frequently advantageous for plans with significant scale to use CITs when available, but the savings should be evaluated against some material limitations of the CIT structure.
- Complexity: CITs can be complex investment vehicles that may be difficult for participants to understand. While similar in structure to mutual funds, information on CITs may be limited to what can be found on the recordkeeping site used by the plan.
- Lack of transparency: CITs are not required to disclose their holdings regularly, which means that it can be difficult for investors to know exactly what they are investing in.
- Limited liquidity: CITs offering documents may impose liquidity restrictions for large transactions, meaning they may not be as liquid as other types of investments. This can make it difficult for a plan to to sellits holdings if needed, for example, in the event of a plan fund level change.
- Complex legal structure: CITs have a complex legal structure that can make them difficult to navigate in the event of a dispute and may require the plan sponsor to conduct a thorough legal review prior to execution. To invest in a CIT, plan sponsors typically need to review and sign off on a lengthy offering document that governs the CIT investment. We typically recommend that plan sponsors utilize outside counsel for reviewing these offering documents given their complexity.
It is important for plan sponsors to carefully consider these risks before choosing to invest in a CIT as part of their retirement plan. Cost reductions may be attractive and should be weighed carefully against risks unique to the CIT structure.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.