Data and Research August 3, 2021

CITs Overcoming Mutual Funds in 401(k)s

Collective investment trusts are the most used investment vehicle in the largest plans and are a close second among large 401(k) plans overall, suggesting they are worth consideration.

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The use of collective investment trusts (CITs) has surpassed the use of mutual funds in 401(k) plans with more than $1 billion in assets, according to data from BrightScope, part of ISS Market Intelligence*.

CITs more strongly dominate the large plan market, particularly within target-date funds (TDFs), BrightScope says. According to the data, in 2009, the target-date market share of CITs in these mega plans was 51%, while the target-date market share of mutual funds was 48%. The market share of CITs has grown steadily since then, to reach 86% in 2018, compared with a 13% market share for mutual funds.

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The BrightScope/Investment Company Institute (ICI) “Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2018” report says mutual funds were the most common investment vehicle in 401(k) plans, holding 43% of large private-sector 401(k) plan assets in the BrightScope database in 2018. However, CITs were close behind, holding 33% of assets. “Mutual funds accounted for at least half of the assets in all but the very largest plans, where a larger share of assets was held in CITs,” the report says. CITs held about 6% of assets in 401(k) plans with $100 million or less in plan assets, compared with 49% in plans with more than $1 billion.

The allure of CITs is their lower cost compared with mutual funds. However, experts point out that some plan sponsors have concerns about CITs that make them skeptical about using the investment vehicles. CITs are less transparent than are other options—they have no ticker symbols, are not regulated by the Securities and Exchange Commission (SEC), are not subject to the Investment Company Act of 1940 (’40 Act) fund rules and participants are less familiar with them than mutual funds.

However, the threat of lawsuits over plan investment fees is also driving more plan sponsors to consider CITs. The different types of lawsuits can inform plan sponsors’ due diligence efforts when making an investment selection. Some lawsuits accuse plan fiduciaries of violating fiduciary duties when reviewing funds and fees because they did not consider available CITs as alternatives to the mutual funds in the plan. Other lawsuits have challenged the selection of untested CITs or the use of CITs with higher expense ratios than other CITs.

The popularity of CITs suggests they are worth considering, but as with any investment vehicle, plan sponsors must always follow a prudent process.

*Editor’s note: PLANSPONSOR is owned by Institutional Shareholder Services (ISS).
Ask the Experts August 3, 2021

Can ERISA Accounts Be Used to Pay for Fiduciary Liability Insurance?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“We currently sponsor an Employee Retirement Income Security Act (ERISA) 403(b) plan with an ERISA expense reimbursement account that we use to pay permissible plan expenses. Can we pay for our fiduciary liability insurance coverage from that account?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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Fiduciary liability insurance coverage is generally eligible for payment from plan assets, so long as the policy permits recourse by the insurer against the fiduciary in cases of a loss owing to breach of fiduciary obligations. Generally, though plans can pay the modest cost of fiduciary liability insurance from plan assets, most plans don’t pay for this expense from plan assets, since the standard policy allows the insurance company recourse to recover a covered loss from plan fiduciaries directly.

Having said this, the employer can purchase a waiver of this recourse provision from the insurer, but that portion of the coverage could NOT be paid out of plan assets. As such, because coverage would be paid partially from plan assets and partially outside of plan assets, and there are not typically large dollar amounts involved, most employers simply pay this coverage directly to minimize administrative complexity.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. 

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