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  • Nicholas Zaiko, CIMA

Collective Investment Trusts

Collective Investment Trusts (CIT), also known as commingled funds, collective investment funds or collective trust funds, are being increasingly offered by more investment managers. Long-accepted as institutional portfolios for defined benefit (DB) plans, in recent years CITs have gained acceptance for defined contribution (DC) plans. CITs generally have high minimum requirements, generally $50 million in assets per investment strategy.

CITs continue to grow for a variety of reasons including improved technological advances among recordkeepers. Many recordkeepers can now track unitized values, daily valuation, pricing flexibility, and most importantly, are compatible with National Securities Clearing Corporation (NSCC) Fund/SERV® which has improved reporting and transparency. CITs provide compliance with Department of Labor (DOL) disclosure requirements under ERISA. CIT trustees are subject to ERISA fiduciary standards with respect to ERISA plan assets that are invested in CITs. Not all mutual funds and separate account strategies are available as CITs, however, the creation of new CITs is rapidly growing.

Collective Investment Trusts Defined

In general, only certain retirement plans such as 401(k) plans and other defined contribution and defined benefit retirement may invest in CITs. CITs are a pooled vehicle that is daily valued, traded on the NSCC’s Fund/SERV® platform, and audited annually.

CITs are pooled investment vehicles organized as trusts and maintained by a bank or trust company. CITs are designed to facilitate investment management by combining assets from eligible investors into a single investment portfolio with a specific investment strategy. By commingling, or pooling, assets, managers of CITs may take advantage of economies of scale to offer lower overall expenses, enhanced risk management, and more diverse and innovative investment opportunities for its investors. Each fund is managed and operated in accordance with the applicable trust’s governing documents, which generally include a declaration of trust (or plan document) and the fund’s statement of characteristics.

NSCC’s Fund/SERV® platform

When CITs were included in the NSCC Fund/SERV® mutual fund trading platform in 2000, order placement methods for CITs began to operate similarly to mutual funds. CITs could now offer automated subscription and withdrawal transactions for DC plans with standardized transaction processing in a daily valuation environment, similar to mutual funds. As a result, the usage of CITs has increased notably among large plans.

Pricing

Although offered by banks and trust companies, CITs assume the same investment risk as other investment strategies. Banking regulators allow CITs to offer variations in pricing to different classes of investors, provided that the fees are reasonable and commensurate with the level of services provided. CIT fees are sometimes more negotiable than fees available in other regulated pooled investment vehicles.

Performance

Performance track records currently present a challenge because many CITs are similar to their mutual fund counterpart but have only been managed as CITs within the last 3-5 years. While the manager and strategy may have a long track record as a mutual fund or other vehicle, according to SEC regulations, the CIT portfolios can only publish the performance of the assets managed in the CIT. This limitation will dissipate over time as these new CIT vehicles develop their own performance track record.

Regulations

CITs are not registered with the Securities and Exchange Commission (SEC), eliminating costly registration fees and extensive public disclosure requirements for the investment manager. CITs are exempt from registration under the Securities Act so long as the CIT is maintained by a bank and participation in the fund is limited to certain investors, such as a DC, DB or profit‐sharing plans.

The Office of the Comptroller of the Currency (OCC) regulates collective investment funds sponsored by national banks and trust companies. While CITs sponsored by state‐chartered institutions are not directly subject to OCC regulation, many states apply the OCC’s rules either by statute, rule, other guidance or as best practices in examining state bank collective trust activities.

Documentation

Plans invest in a CIT through an agreement between the trust company and the plan fiduciary, which is often called an Investment Management Agreement, Custody Agreement, Participation Agreement, Adoption Agreement or Joinder Agreement.

DOL and ERISA

CITs are subject to ERISA to the extent there are ERISA plan assets invested in the CIT and therefore are subject to DOL scrutiny. Because CITs are typically deemed to hold ERISA plan assets, the trustee and any sub‐adviser of a CIT generally serve as ERISA fiduciaries and must comply with ERISA fiduciary standards in managing the CIT. In addition, all transactions, including those between the CIT and any parties of interest as well as the CIT’s fiduciaries, must comply with ERISA’s prohibited transaction rules. Lastly, the CIT sponsor is also subject to various reporting and disclosure requirements.


Source: The Coalition of Collective Investment Trusts (CCIT)

(925) 743-0200

2603 Camino Ramon, Suite 200, San Ramon, CA 94583, USA

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