Since their inception in 1927, collective investment trusts (CITs), also known as collective trust funds (CTFs), have seen dips and swells in popularity. Recently, they’re showing a strong growth trend as more investment managers recognize their value, convenience and flexibility. In fact, according to the 2017 Investment Company Fact Book, the “share of assets held in CITs by 401(k) plans with 100 participants or more” grew from six percent in 2000 to 17 percent in 2015.
In this article, we’ll look at the structure of CITs, examine their benefits and discuss how to find your best options.
What is a CIT?
A CIT is a pooled investment vehicle designed specifically for institutional retirement plans. Most CIT solutions offer comprehensive trustee, fund accounting, fund administration, transfer agent, custody and National Securities Clearing Corporation (NSCC) sponsorship support.
CITs are governed by a Declaration of Trust, which details the structure of the funds and the role of the trustee. In addition, each CIT has a Supplemental Declaration of Trust, which outlines the investment objective and guidelines for the fund. CITs qualify under Code Section 401(a) as a group trust and are exempt from income taxation under Code Section 501(a).
Much of the recent growth of CITs can be attributed to their inherent flexibility. They can utilize a wide range of strategies and invest in a diverse selection of securities, including mutual funds, derivatives, and alternative asset classes and vehicles. However, the strategies or underlying assets used must comply with the fund’s stated investment objective and restrictions. It typically takes 30-45 days to open a CIT. This includes time to create a supplemental declaration of trust, execute a sub-advisory agreement and set up the operational accounts.
Investment manager benefits
In the CIT model, investment managers are engaged as sub-advisers to the trusts. This creates flexibility in portfolio management. It also enables convenient distribution of CITs alongside separate accounts, mutual funds and alternative products. As a result, managers gain substantial value through a diversification of investments, improved earnings and economies of scale. Additional benefits of CITs include:
- Cost structure: Lower, customized operating costs are based on straightforward structure, regulatory status and no 12b-1 fees
- Regulatory restrictions: Exemption from the 1940 Investment Company Act and SEC registration provides for fewer regulatory restrictions
- Investment flexibility: You’re able to invest in listed securities, mutual funds, ETFs and alternative investment vehicles
- Retirement product: Access to retirement market increases opportunity for market share in the defined contribution industry
- Simplified marketing: As a private offering solely for qualified plans, marketing and branding efforts are eliminated
Choosing the right trustee
Service providers that offer the best product knowledge and direction are usually ones that have a long, ongoing tradition of successfully operating CITs. Turnkey solutions are available and apply the expertise of trusted partners to guide investment managers through every step of the CIT process. These solutions can be configured to structure CITs for cost-sensitive clients with retirement plan investment options.
To begin the process, a trust company reviews and approves the investment manager as a sub-adviser to the CIT. The sub-advisers provide investment-advisory and trade-execution-management expertise to ensure the ongoing success of the product. They work alongside the trustee and other partners to set the investment policies and review the various activities of the trusts.
Reviewed activities include performance versus the benchmark, compliance and overall suitability as a fiduciary of the CIT. As part of this review, sub-advisers must provide any necessary information to the trust company, including the following:
- Quarterly fund and market commentary
- Monthly performance
- Annual buy list
- Annual presentation to the investment committee (or more frequent presentation if required)
- Immediate notification of issues related to fund positions
- Immediate notification of changes in investment advisory firm personnel and/or strategy
Because of their flexibility and many benefits, it’s not surprising more investment managers are taking advantage of CITs each year. The CIT model provides exceptional versatility, value and convenience for institutional retirement plans. Depending on your requirements, this pooled investment vehicle could very well be the right solution for you.
To learn more about CITs and whether they might be right for you, please visit U.S. Bank Global Fund Service. For additional information, contact a business development officer in your area.
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