Collective Investment Trusts (or CITs) Gaining Momentum

One is that plan sponsors are increasingly concerned about their fiduciary responsibilities and the risks that accompany them. Costs are one of those concerns, and CITs' fees on average are 40 to 50 percent lower than actively management mutual funds.

Late last year, Caterpillar, the equipment manufacturer, agreed as part of a court settlement to use CITs within its retirement plan to lower its plan expenses. Other plan sponsors – many of whom were already regaining interest in CITs — took note of the suit, and others like it.

CITs have been around for over 70 years. They can now provide daily valuations and trading through National Securities Clearing Corp. Plan sponsors can offer participants trusts with a variety of investment objectives, including target date funds.

Unlike mutual funds that are regulated by the SEC, banking regulators oversee CITs. Also, CITs are less likely to provide their pricing data in newspapers and on websites, although Morningstar tracks over 1,000 U.S.-based CITs.

"Information about the CITs is communicated to plan participants in several ways", says Ed Riley, First Mercantile Trust's chief investment officer. "Each participant receives an investment profile sheet for each CIT in the initial enrollment packet, and monthly investment returns and daily trust unit values are found on the participant website."

There is a drawback with CITs that advisors should keep in mind for their clients: Participants can't roll over their CIT-balances when they leave the 401(k) because the trusts do not trade on open markets. Consequently, the participant must choose between leaving the assets with the previous employer (if permitted) or liquidating his or her CIT holdings and then rolling over the cash position to the new employer's plan or an IRA.