Amended with clarification
Launched two years before the Wall Street crash of 1929, collective investment trusts are making a comeback in 401(k) plans, offering a lure of lower fees and greater flexibility in investment options.
“The impression we have is that CITs are continuing to gain momentum,” Steve Deutsch, director of collective trusts and separate accounts for Morningstar Inc., Chicago, said in an interview. “The products are being given more focus by money management firms,” which are lowering investment minimums and adding target-date funds to the CIT menus.
Mutual funds now dominate 401(k) plans, but CITs have been gaining market share, according to Cerulli Associates, Boston. CITs had 17% of the market in 2005 vs. 45% for mutual funds. By 2008, the CIT market share was 20.9%, while the mutual fund share was 44.6%.
In the early days of 401(k) plans, CITs “greatly outnumbered” mutual funds as investment options, said a recent Cerulli Associates report. At that time, the typical CIT was valued quarterly and provided “only a limited disclosure statement” about investment strategy, said the report. Mutual funds surged ahead by offering daily valuation and “superior” disclosure to clients, the report said.
Now, however, most CIT offerings can be valued on a daily basis, administration costs have dropped, and product customization has provided a stiff challenge to mutual funds, Cerulli said.
The momentum driving greater interest in CITs is propelled by prospects of lower costs, Mr. Deutsch wrote in a recent analysis of the CIT market. These include “reduced marketing expenses, no 12b-1 fees, no time and cost of independent boards, no Securities and Exchange Commission and state filings, no prospectuses (and a) lower record-keeping burden,” he wrote.
Other benefits include the ability of plan executives — especially from large plans — to negotiate prices and to customize investment options, he said. Some 45% of DC plans use collective investment trusts, according to Morningstar's estimates. Among those with at least 1,000 participants, 70% do.