Retirement Plan Governance Considerations for Collective Investment Trusts

Plan sponsors considering collective investment trusts for their 401(k) plans should focus on the product provider’s CIT governance policies and procedures, according to industry experts.

A Wilmington Trust white paper, “Collective Investment Trusts and Good Governance Considerations,” discusses the differences and similarities  between mutual funds and CITs, and suggests several questions plan sponsors should ask providers when mulling a switch. The white paper was authored by Jeb Bowlus, associate general counsel at Wilmington Trust, and Tom Roberts, principal at Groom Law Group, Chartered.

CITs’ structure demands that plan sponsors and advisers considering the vehicles know how they differ from mutual funds, because each are subject to distinct rules, regulations and fiduciary obligations. Plan sponsors need to be confident that CITs do not unduly sacrifice investor protections, said Rob Barnett, head of intermediary sales at Wilmington Trust, during a webinar.  

They also must ask the right questions of the bank trustee chosen to operate the CIT, because the provider will have ongoing co-fiduciary responsibility for the plan, according to the webinar speakers.  

Compare and Contrast

CITs and mutual funds are both pooled investment vehicles. Like mutual funds, CITs adhere to stated investment objectives and strategies, and in pursuing them often engage the services of investment managers or advisers. CITs are Employee Retirement Income Security Act plan asset vehicles that are not subject to the prospectus, financial reporting requirements, and expense rules of the Investment Company Act of 1940.They are available exclusively to qualified retirement plans and other classes of eligible investors.   

Using CITs rather than mutual funds also has several fiduciary implications for the plan, explained Bowlus.

“The legal and regulatory structure of the two vehicles is fundamentally different,” he says.  CITs are plan asset vehicles for ERISA purposes, which means that ERISA standards of prudence and loyalty apply to those who manage and exercise discretionary authority over a plan’s assets, Bowlus added. Therefore, trustee banks responsible for managing CIT assets are subject to ERISA’s fiduciary standard.

“Mutual funds, by contrast, are non-ERISA plan asset vehicles,” he said. Bowlus also noted that while mutual funds are subject to rigorous standards under the ’40 Act, investment managers are not necessarily ERISA fiduciaries and are not subject to ERISA liability for managing fund assets.

CITs’ Use

CITs’ use as an investment vehicle for participants’ retirement assets has increased, Barnett said. “Interest in adoption and use of CIT is by 401(k) plans and their advisers has skyrocketed in recent years.”

Among 401(k) plans with at least $1 billion in assets, total assets in CITs now surpass those in mutual funds. “Migration away from traditional mutual fund products to CITs is something that is happening across the 401(k) plan spectrum, and it is increasingly trending up in the mid- to small-plan end of the market,” Barnett said, explaining that usage has increased because the structure harnesses the efficiency of pooled investing at a low cost.

“Unlike a mutual fund, a CIT is able to avoid the expenses associated with ’40 Act registration and compliance, including the expense of prospectus and annual report production and mail,” he said.  

CITs can also help mitigate litigation risk, Barnett added. “At the same time, the Department of Labor and the plaintiffs’ bar are placing unrelenting pressure on 401(k) plan sponsors and advisers to find ways to reduce overall levels of plan investment expenses,” Barnett said. “[A] CIT is responsive to that need.”

Plan Sponsor Governance

Plan fiduciaries must consider the governance implications for the plan before using a CIT, explained Groom Law Group’s Roberts, during the webinar.

Often overlooked when considering a CIT is whether the trustee is actively and prudently overseeing the management of funds. That is one of several common mistakes plans make with CITs, Roberts explained. 

“It is not an uncommon mistake for members of the 401(k) community to look at CIT providers as nothing more than asset custodians, and nothing could be further from the truth,” he said. “A CIT product and the duties of a CIT trustee are far more extensive. Trustees are asset managers.”

Plan sponsors and advisers need to consider governance because this is a value-add for the plan and not all trustees operate in the same way, Roberts said. “In governance, how a CIT provider goes about doing its job matters, and it should matter to plan participants, it should matter to advisers, and it should matter to plan sponsors.”

Governance is important because the CIT trustee is a service provider to an ERISA plan sponsor or adviser, and the plan’s fiduciaries must continuously assess whether the plan is getting good value for the fees that are being paid. “You would ask those questions of most any service provider and they deserve to be asked of CIT providers as well,” Roberts said. “But second, a trustee is a special kind of service provider. It is a fiduciary, and a special kind of fiduciary—it’s a 3(38) investment manager.”

Therefore, when a plan is engaged to a CIT trustee, it is appointing a co-fiduciary and delegating investment responsibilities to a 3(38) investment manager. “Now any fiduciary that’s appointing another fiduciary, even one appointing a 3(38) investment manager, has a residual responsibility to monitor and oversee whether or not the appointed fiduciary is doing its job,” Brown explained.

Roberts suggested that, to understand whether the trustee is doing its job, plan sponsors and advisers should ask:

• What are your governance policies and procedures?
• How do you go about your business as a trustee?
• Are you being diligent about the operations of the fund? Are you watching over the activities of the subadvisor?

“All of those questions go to the fact that where you have an active and engaged CIT trustee, their diligence, their work is inherently protective of plan interests and of participant interests, and of other fiduciaries’ interests,” Roberts said. “Their duty is to actively oversee, to actively monitor, and if they see something is amiss or astray to take prompt action. Where a trustee bank is doing its job, and doing it well, those governance processes are very important for plans, for participants, and for hiring fiduciaries alike.”