How are collective investment trusts (CITs) different from mutual funds?

A collective investment trust (CIT) is a type of investment fund available only through specific workplace retirement plans, like your 401(k). Imagine it as a big pool of money, gathered from many employees' retirement accounts, which is then invested together across a variety of stocks, bonds, and other assets. The main goal of a CIT is to grow or preserve the value of these investments over time to help you save for retirement.

CITs are managed by professional money managers, much like regular mutual funds. Unlike mutual funds, CITs are not available to the general public and typically can come with lower fees due to fewer marketing and regulatory expenses. Because they are set up as "trusts" rather than publicly available funds, they often can have lower operating costs. This unique setup typically can mean lower fees for you, the investor. While CITs have been around for decades, they've become popular recently as a potentially more cost-effective way to invest in your company's retirement plan.

Potential advantages for the everyday investor

While the structural differences can seem technical, they can lead to real-world benefits for your retirement account.

Lower costs: We believe this could be the most significant advantage. Because CITs don't have the same marketing, distribution (12b-1), and extensive regulatory filing costs as mutual funds, their operating expenses tend to typically be lower. Even a small difference in fees (a fraction of a percent) can add up to thousands—or even tens of thousands—of extra dollars in your account over 20, 30, or 40 years of investing.

Professional management: Just like mutual funds, CITs are managed by professional investment firms. Their job is to pick investments that aim to meet specific goals, giving you the benefit of professional management, a diverse mix of investments,* and the power of investing on a large scale. 

*Diversification does not ensure a profit or protect against loss.

Fiduciary oversight: The trustee of a CIT (typically a bank or trust company) has a fiduciary responsibility to act in the best interests of the investors in the trust. This can help provide a strong layer of investor protection.

Considerations about CITs

Before investing in a CIT, it's also helpful to consider the following points.

• Less public information: It can be harder to find detailed public reports or outside research on a specific CIT compared to a typical mutual fund. This is because they aren't publicly traded like mutual funds.

• Not directly portable: If you leave your job, you can't simply move your CIT investment directly to an individual retirement account (IRA) or your new employer's 401(k). Instead, you'll need to sell your shares in the CIT, and then move the resulting cash to your new retirement account. While this may not be viewed as a hurdle, it is an extra step to be aware of.

CITs vs. mutual funds: A comparison

Like mutual funds and other types of investments, investing in a CIT is subject to risk, including risk of loss. While CITs and mutual funds share the goal of pooling investor money to buy a diversified portfolio of securities, there are several key differences.

Frequently asked questions about CITs

Who can invest in a CIT? 

Investment in CITs is generally limited to qualified retirement plans, such as 401(k)s, 457s, and certain pension plans. 

Notably, 403(b) plans are generally not eligible to invest in CITs due to federal regulations that require 403(b) assets to be held in specific investment vehicles, like annuity contracts or mutual funds. You cannot buy a CIT directly in a regular brokerage account or an individual retirement account (IRA). Your ability to invest depends entirely on whether your employer's retirement plan has chosen to offer them as an option.

Why are CITs often less expensive than mutual funds? 

CITs have a simpler regulatory setup. They aren't required to create and mail expensive prospectuses, and they usually don't have the large marketing and advertising budgets that many mutual funds may have. Plus, they don't have "12b-1 fees," which are fees mutual funds use to pay for sales and marketing. This lower overhead helps make it possible to pass those savings on to investors as lower fees.

How do I find information about a CIT's performance and holdings? 

Since most CITs don't have public ticker symbols, you can't easily look them up on general financial websites. Instead, your retirement plan administrator is responsible for giving you all the necessary details. You'll typically find this information in fact sheets or other disclosure documents available through your plan's online portal. These documents will explain the fund's investment strategy, its top holdings, past performance, and fees.

Are CITs risky?

Like all investments that are not insured, CITs carry market risk, meaning you could lose money. The level of risk depends on the CIT's underlying investment strategy. A CIT that invests in stocks will generally carry more risk than one that invests in bonds. The risks are similar to those of a mutual fund with a comparable investment objective. Investors should carefully read the relevant Disclosure Memorandum to understand more about the specific CIT's risks.

What happens to my CIT investment if I leave my job?

Because CITs are only available within specific employer retirement plans, you may be able to keep your funds in the CIT if your balance is over a certain amount (based on plan rules). Often, however, you may be required to sell your shares in the CIT, and then you can take the resulting cash and either roll it over into an IRA or your new employer's retirement plan, or take a distribution according to your plan's rules. 

Are CITs a new type of investment?

Not at all. CITs have been around for nearly a century. For a long time, they were primarily used by large pension plans. It's only in the last 15-20 years that they have become a more common and popular option within defined contribution plans like 401(k)s, largely driven by a demand for lower-fee investment options.

Can a CIT have the same strategy as a mutual fund?

Yes, this is very common. Often, an investment management company will offer its popular mutual fund strategies in a CIT wrapper (the legal and operational framework of a CIT). It's essentially the same investment portfolio, managed by the same team, but offered at a lower cost to retirement plans. Your plan's documents may even note that the CIT "seeks to replicate" the strategy of a specific mutual fund.

How is the price of a CIT calculated?

Similar to a mutual fund, a CIT's price is calculated as a Net Asset Value (NAV) per share. The total value of all securities in the trust's portfolio is calculated at the end of each business day, and this value is then divided by the total number of shares to arrive at the price. You buy and sell shares at that day's closing NAV.

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Investment Advisory services are provided through Human Interest Advisors LLC (HIA) to plans that select HIA as the investment adviser. HIA is a Registered Investment Adviser and subsidiary of Human Interest Inc. For more information on our investment advisory services, please visit http://www.humaninterest.com/hia/.