Thursday, February 29, 2024

Exploring the Benefits of a Collective Investment Trust

If you are looking for a way to diversify your retirement portfolio and lower your investment costs, consider a collective investment trust (CIT). A CIT is a pooled fund operated by a bank or trust company and designed for qualified retirement plans such as 401(k)s, pensions, and profit-sharing plans.

CITs work similarly to mutual funds but with very key differences. CITs tend to offer more flexibility and efficiency than mutual funds, as mutual funds must adhere to certain regulations that don’t apply to CITs. Here is a look at how CITs work and how institutions and individuals can benefit from exploring CITs.

What Is a Collective Investment Trust?

A CIT, also known as a CIF (collective investment fund), is a group of pooled accounts held by a bank or trust company that invests in various assets, such as stocks, bonds, commodities, derivatives, and even mutual funds. The bank acts as a fiduciary and has the legal title to the assets in the fund.

Participants in the fund are the beneficial owners of the assets and do not own any specific asset held in the CIT. Rather, participants have an interest in the fund’s aggregated assets.

A CIT can have different investment objectives and strategies depending on the needs and preferences of the participants. For example, a CIT can focus on growth, income, capital preservation, domestic markets, international ones, or specific sectors. Some may use active or passive management styles or a combination of both.

Typically, the availability of a CIT will come from an employer-sponsored retirement or pension plan. Otherwise, it’s an insurance company that offers a CIT, rather than a bank or other financial institution.

How Does a Collective Investment Trust Work?

A CIT is a trust created by a sponsor. The sponsor has responsibility for managing the trust and ensuring it complies with the law. The trust pools the assets of multiple investors and invests them in a variety of securities.

The securities in the trust have an investment manager responsible for selecting securities and making investment decisions. That’s all there is to it.

A CIT works similarly to a mutual fund in that it pools money from different investors and invests according to a predetermined strategy and objective. However:

This reduces administrative and compliance costs for the fund and allows it to operate more efficiently. The lack of shareholders means a CIT does not have to pay dividends or capital gains distributions to its investors. This makes it more tax-efficient and avoids potential tax liabilities for the participants.

What Are the Benefits of a Collective Investment Trust?

A CIT offers several benefits to investors who are looking for an alternative way to invest their retirement savings.

Cost efficiency, lower fees, and lower expenses

CITs often have lower expense ratios compared to mutual funds or exchange-traded funds (ETFs) with no sales loads or 12b-1 or shareholder fees. These lower costs can translate into higher returns for the participants over time.

Flexible and customizable investment options

It’s possible to tailor a CIT to a specific investment strategy, objective, or set of investment guidelines to suit the specific needs and preferences of its participants.

Enhanced and increased fiduciary oversight:

A CIT is subject to the fiduciary responsibility guidelines established by the Employee Retirement Income Security Act (ERISA). The bank or trust company that operates the CIT must act in the best interest of the participants and follow prudent investment practices. The trust must also provide regular reports and disclosures to sponsors and participants about the fund’s performance, fees, and risks.

Tax efficiency

A CIT has an exemption from federal income tax if it meets certain criteria. This also means that it does not have to distribute any dividends or capital gains to its participants, which can avoid potential tax liabilities for them.

Beyond these and other benefits, a CIT offers professional asset and portfolio management. A CIT also comes with an ease of use that many investment vehicles lack.

How to Choose and Invest in a Collective Investment Trust

If you are interested in investing in a CIT, you will need to check with your employer or plan sponsor to see if they offer this option in your retirement plan. You will also need to review the fund’s offering document, which is like a prospectus for a mutual fund, to understand its investment objective, strategy, risks, fees, and performance.

There are many factors to consider when choosing a CIT:

  • Your investment goals
  • Your risk tolerance
  • Your investment horizon
  • Your comfort with the associated fees

While it’s true a CIT can come with far fewer fees than similar investment vehicles, it’s also true that different CITs can have different fee options and fee structures. These same considerations apply to institutions that want to sponsor or offer a CIT.

A CIT can be a valuable addition to your retirement portfolio or retirement offerings if you are looking for a way to diversify investments and lower costs. You can and should spend some time doing a little research on what a CIT can offer you or your business specifically. In this way, you can determine if a collective investment trust is the right investment vehicle for you.