Savers interested in investing in collective investment trusts (CIT) as part of

their 401(k) plans should make sure they fully understand what these

investment vehicles are and how they work. While CITs in some ways are
much like mutual funds and are often run by mutual fund companies, there are
major differences.

Both are pooled into investment vehicles and follow a specific investment
strategy. But while mutual funds are open to the public to invest in, CITs are
designed to be part of a 401(k) plan or pension plan and can be custom
designed to fit the needs of the plan.

An investment manager or mutual fund manager typically oversees the

management of an actively managed CIT portfolio, whereas a passively
managed CIT may track an index, much like indexed mutual funds. The
assets within the portfolio can be made up of stocks, bonds, exchange traded
funds, real estate, private equity, and mutual funds. In fact, some CITs mimic
publicly traded mutual funds and may use the same manager or strategy.

Along with CITs, commingled funds (CFs) or collective trusts (CT) are also

offered in some 401(k) plans. Others offer stable-value funds, which are a low-
risk savings vehicle, another form of a CIT.

Not Regulated Like Mutual Funds

One major difference between CITs and mutual funds that investors
and financial advisors should be aware of is that CITs are not subject to
the Investment Company Act of 1940, which includes various regulations
governing mutual funds, as well as extensive disclosure requirements.

CITs also do not have to be registered with the Securities and Exchange

Commission as do mutual funds. And while mutual funds are actually
managed by an investment company, CITs are commingled accounts offered
through banks or trust companies. That means that the Office of the
Comptroller of the Currency regulates them. Similar to mutual funds, however,
the assets in a CIT are not insured by the Federal Deposit Insurance
Corporation (FDIC).

Lower Costs
CITs' administrative expenses are typically lower than those of mutual funds
because they are not subject to the many regulations that mutual funds must
abide by. CITs also do not have the added expense of marketing because
they are not targeting individual investors, so this too helps to keep costs
down. Lower costs are an added attraction for investors and give CITs an
advantage over their higher-cost mutual fund counterparts.

According to Morningstar, Inc. (MORN) data, the median expense ratio for

large-blend mutual fund share classes is 1.06% and for institutional share
classes, it's 0.75%. By contrast, the median expense ratio for a CIT large-
blend share class is 0.60%. Many CITs also use index-based strategies,
which cost far less than actively managed funds to run, giving them another
advantage over mutual funds.

Interest in these investment vehicles continues to grow. At the end of 2012,

there were 2,150 CIT share classes tracked by Morningstar. Today,
Morningstar tracks 1,680 CITs made up of 3,300 share classes. Many of those
CITs are, in fact, target-date funds, which are growing in popularity. Part of
this growth can be attributed to the fact that in 2006 the Pension Protection
Act made it possible for employers to offer CITs as default investment choices
in their 401(k) retirement plans. 

Lack of Transparency 
Employees interested in investing in CITs should be aware that CITs are not
subject to the same disclosure requirements as mutual funds. That means that
there is less information available about them. So before investing in CITs,
employees should find out if their retirement plan makes quarterly
performance data available. More often than not, performance data on these
funds is not more frequently available.

Information about CITs holdings is also often not made readily available to
investors. And while some plans do provide daily price information about CITs
on their web sites, many do not. This could present a problem for those
investors looking to take a distribution or rebalance their portfolio.

One way to garner more information on a CIT is to look at a publicly traded

mutual fund that has a similar portfolio and is run by the same manager or
company as the CIT. By doing so, an investor can compare the mutual fund’s
price and performance history to that of the CIT. One caveat investors should
be aware of, however, is that the fees and various other differences between
the CIT and mutual fund could result in differing performance results.

Stewardship
The stewardship of a CIT also differs from that of a mutual fund. Unlike mutual
funds, CITs are not required to have boards of directors. However, under
the Employee Retirement Income Security Act (ERISA), retirement plans are
required to act as fiduciaries of these funds, looking after participant’s
interests. Still, investors should make sure to read the summary plan
description of a CIT, which describes how the fund works. CITs are required to
make these documents available to investors.

Other pertinent information may also be made available by the various CITs,
such as information about the fund's manager, fees charged, holdings,
strategy, and performance. If the CIT does not provide the information the
plan administrator or the human resources department of the employer may
provide it.

The Bottom Line

Employees looking to invest in a CIT offered by their company’s retirement
plan should make sure to read up on any and all information being offered
about the fund. They should also look to see if a qualified fund manager is
running the fund and if and when performance data will be available for
review.