Navigating the Challenges of Collective Investment Trusts (CITs)

As the retirement industry continues to evolve, Collective Investment Trusts (CITs) have emerged as an increasingly popular investment vehicle for defined contribution plans. CITs offer a range of potential benefits, including lower costs, greater flexibility, and enhanced transparency. However, managing CITs also comes with its own set of unique challenges that plan sponsors and fiduciaries must navigate.

Fiduciary Responsibilities

When a retirement plan invests in a CIT, the CIT’s trustee and investment manager are subject to the fiduciary duties outlined in the Employee Retirement Income Security Act (ERISA). This means plan sponsors must carefully evaluate the CIT’s investment strategy, risk profile, and fees to ensure they are acting in the best interests of plan participants.

Navigating these fiduciary responsibilities can be a significant challenge, as plan sponsors must balance the potential benefits of CITs with the need to fulfill their duty of prudence and loyalty to plan participants.

Transparency and Disclosure

While CITs have become more transparent in recent years, there are still important differences in the disclosures and reporting requirements compared to mutual funds. Plan sponsors must ensure they have access to the necessary information to make informed decisions and provide participants with the required disclosures.

This may involve negotiating with CIT providers to obtain detailed information on the CIT’s holdings, performance, and fees, and then effectively communicating this information to plan participants.

Investment Menu Considerations

Integrating CITs into a retirement plan’s investment menu can also present challenges. Plan sponsors must carefully evaluate how CITs compare to other investment options, such as mutual funds, in terms of investment strategy, risk, and cost.

They must then determine the appropriate allocation and role for CITs within the overall portfolio, ensuring that the investment lineup remains well-diversified and aligned with the plan’s objectives.

Vendor Relationships and Oversight

Managing the relationship with CIT providers, including the trustee and investment manager, is crucial. Plan sponsors must conduct due diligence, negotiate fees, and establish robust monitoring and oversight processes to ensure the CIT continues to meet the plan’s needs.

This may involve regular reviews of the CIT’s performance, risk, and compliance, as well as ongoing communication and collaboration with the CIT provider to address any issues or concerns that arise.

Regulatory Complexity

CITs are regulated by the OCC rather than the SEC, creating a different compliance environment. Additionally, the fiduciary responsibility under ERISA adds another layer of regulatory oversight. This can lead to ambiguities in who is responsible for policing investments, with distributors and asset managers potentially playing different roles.

Workflow Inefficiencies

Managing CITs involves extensive paperwork and administrative coordination. The lack of standardization in documents and attribute inclusion adds time and inefficiency to the onboarding process. With multiple parties involved, such as consultants, advisors, plan sponsors, and trustees, the process can become increasingly complex.

Data Management Issues

Unlike mutual funds, CIT data is not always readily available, making reporting and reconciliation difficult. Some CIT data is registered through the NSCC, while others remain private, leading to inconsistency. Firms need a robust data management system to integrate and access CIT information efficiently.

Operational Risks

CITs require careful oversight to mitigate risks associated with transparency and compliance. A lack of standardized processes can result in errors in valuation, NAV calculations, and reporting. Inconsistent tracking and reconciliation pose financial and regulatory risks.

To overcome these challenges, plan sponsors and fiduciaries should seek the guidance of experienced professionals, such as investment advisors and technology third-parties, who can help navigate the complexities of CIT management. Additionally, staying up-to-date on regulatory changes and industry best practices is essential for effectively leveraging CITs within a retirement plan.

By understanding and proactively addressing the unique challenges of CIT management, plan sponsors can unlock the potential benefits of this investment vehicle and provide their participants with a more cost-effective and diversified retirement savings solution.

However, it is important to recognize that managing CITs requires a significant investment of time, resources, and expertise, and plan sponsors must be prepared to dedicate the necessary attention and effort to ensure the successful integration of CITs within their retirement plan.

Download our eBook: The Complexities of Collective Investment Trusts (CITs), and contact Delta Data to learn how technology can help address best practices and solutions in a rapidly growing CIT market.