Collective Investment Trusts (CIT) could become the dominating investment vehicles in the defined contribution (DC) market, according to a new white paper by ALPS, a subsidiary of DST Systems, in collaboration with DST kasina.

Like mutual funds, CIT are comingled investment vehicles. However, they are exclusively sponsored by banks or trust companies for qualified retirement plans. They also operate under varying fee and compliance structures that may provide an edge for plan sponsors.

The white paper argues that certain advantages CITs could pose over mutual funds have made them more competitive within the DC space, especially under the current regulatory and compliance environment.

“We believe the continued regulatory focus on fees and fiduciary oversight positions CITs for continued growth, particularly in the defined contribution space,” says Lisa Mougin, senior vice president and director of sales at ALPS.

According to DST research, the relative cost savings of CITs against institutional and R6 class mutual funds is estimated to range between the 10 to 30 basis points. The white paper also notes CITs could provide savings based on their regulatory structure. CITs are regulated by the Office of the Comptroller of the Currency (OCC) rather than the Securities and Exchange Commission (SEC), which ALPS says could reduce compliance costs. Because CITs are used exclusively in retirement plans, they are not allowed to advertise. This reduces marketing expenses.

The firm concludes that, “Just based on these lower compliance and marketing costs, CITs are usually much more economical than retail or institutional mutual funds. As a consequence, plan sponsors have increasingly evaluated and adopted CITs in their DC plans.”

According to DST data, CITs are outpacing the overall retirement market by growing at a seven-year compound annual growth rate (CAGR) of 14.4%, compared to less than 9% for the overall retirement market during the same time period. The firm projects CITs could reach $3.1 trillion in total retirement assets by the end of 2018, up from $1.9 trillion at the end of 2015.

However, CITs represented less than 14% of assets in all CIT-eligible plans in 2015. ALPS argues this could offer “ample headroom for the investment structure to grow in the years to come.”

The firm also points to how CITs have become more attractive to plan sponsors in recent years as a large number of plans have come under lawsuits over alleged fee-related violations to the Employee Retirement Income Security Act (ERISA).

The white paper notes that fee structures for CITs in DC plans are negotiated with the plan sponsors, while fees for mutual funds are set by the asset manager. In regard to oversight and regulation, CITs are subject to ERISA standards while mutual fund managers aren’t always held to ERISA standards.

DST says that based on its interviews with plan sponsors, many are considering CITs as an investment sleeve for their 401(k) plans due to cost advantages.

The white paper indicates that CITs providers can tailor funds to meet specific plan goals for specific participant demographics and risk preferences. It concludes “Ultimately, the breadth of investment options and the flexibility to customize outcome-driven plans are considered to be the biggest advantage of CITs. Most CITs will not have esoteric investments that are challenging to price daily. However, the option to include TIPS, commodities, hedge funds, and annuities in a complex multi-asset class structure enabled CIT-based target date funds to be customized to the unique needs and demographics of a plan sponsor’s workforce.”

Currently, the DST notes that large and mega plan sponsors have been the “optimal audience” for CITs but use is growing among small plans as well. 

Information about accessing “Collective Investment Trusts — A Perfect Storm” by DST can be found here.