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Don't Know About CITs? You Probably Should

Don't Know About CITs? You Probably Should

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Collective investment trusts, or CITs, are becoming more prevalent in retirement plans, such as 401(k)s. Joining me today to talk about what CITs are, why we're seeing more of them, and what that means for retirement plan participants is Jason Kephart. Jason is a strategist with Morningstar's Multi-Asset Funds Research team.

Hi, Jason. Thanks for being here today.

Jason Kephart: Thanks for having me.

Dziubinski: Let's start out by talking about what a collective investment trust is, also a CIT, and how that differs from a mutual fund.

Kephart: So, essentially, it's just another wrapper. They tend to be managed the exact same way as mutual funds. It's all the same firms, Vanguard, American Funds, Fidelity, BlackRock, all the common household names. Really, it's just a wrapper that you're getting at the end of the day that's different. And what the key here is, is how they're regulated. Mutual funds are regulated under the Investment Company Act of 1940, while CITs are regulated under the Employee Retirement Income Security Act. Now, that's the key difference between the two. And the difference, what it translates to is, if you're in a mutual fund, if you and I are in the same share class of a mutual fund, we have to pay the same fee, no matter what, by law. If you have $100 million and I have $1 million, we still are going to pay the same fee. CITs don't have that rule under ERISA. So, firms can negotiate with plan sponsors to get better fees for plans that have a lot more assets than smaller plans. What we're really seeing is, which is kind of the exciting part for plan participants is, CITs used to really only be available on the biggest plans, mega plans, but we're seeing those come down to smaller plans and as they do, those cost savings should be passed on to participants throughout more retirement plans.

Dziubinski: Why have we seen an increase in the number of CITs in defined-contribution plans like 401(k)s?

Kephart: I think the fee thing is really driving it. There's been a laser focus from plan sponsors on lowering fees. There's also been a wave of lawsuits against 401(k) plans over excessive-fee arguments. And so, CITs are one way to say--for plan sponsors to say--they did their fiduciary duty, put their best foot forward, got the best market price they can get for their plan. So, I think it kind of shields them a little bit from those excessive-fee lawsuits. I think that's really what's been the impetus for driving this. But at the end of the day, the participants are going to win if fees are lower.

Dziubinski: Now, Jason, you've done some work looking specifically at the increase in collective investment trusts in target-date strategies. So, what does the data show, say, over the past decade or so about the uptake there and the increase?

Kephart: Yes. So, what we've seen is that CIT's market share of total target-date strategy assets is growing rapidly. Six years ago, it was less than 20%. When we updated our target-date landscape at the end of 2020, it came out to about 43%. It's going to be over 50% in a couple of years now. So, we're really seeing this really rapid growth. And what's really interesting is, people might not even know that they are investing in CITs on their retirement plans. It's hard to really tell the difference just from a line item. I think people at Morningstar--we have a CIT on our 401(k) plan. And I don't know if everyone even knows that CIT is not a mutual fund.

Dziubinski: That's interesting. And where are flows going if we're looking at target-date strategy flows? Is it going more toward the larger firm CITs or more toward the mutual funds? Or how is it looking?

Kephart: We're seeing the flows increasingly shift toward the CITs. And the mutual funds are still in positive territory for the most part, but firms like Vanguard, we're seeing a massive shift in interest toward their CITs as firms just--even Vanguard can get cheaper, right? It's kind of crazy. Their institutional share class in their target-date fund is 9 basis points, but their CITs, you can get a dramatic fee cut from there, as dramatic as you can get going from 9 to 0. But when you have $100 billion plan, every basis point that you save on fees is another basis point that goes toward your plans or your participants' ability to save for retirement.

Dziubinski: We've also seen some families converting their mutual funds into CITs. How does that work? What's going on?

Kephart: Yeah. So, that's another trend we've seen accelerating over the past three years. CIT conversions are reported to Morningstar by the fund companies, so we can adjust our net flows numbers. And what we've seen is just a really pickup on that. And what it is, is once a plan has enough assets to really qualify for the CIT or gets more comfortable with that CIT structure, we're seeing them move just one to one. So, say, T. Rowe Price Target Retirement mutual fund--just move it right into the CIT, get lower fees for your participants in that one kind of easy move.

Dziubinski: I'm assuming we think this uptake is going to continue based on what we've seen, right? Like, what other factors are working in favor of this continuing to be a trend?

Kephart: I think the other thing you're seeing is a lot more innovation in the CIT space. It seems like firms are a little bit more comfortable--experimenting is probably too strong a word but--trying new things. Like, CITs, target-date funds, it's not uncommon to see direct real estate as a small holding, whereas only one target-date mutual fund has one. We're also seeing the new push toward guaranteed income within a target-date manifesting itself within CITs, that seems to be the big trend right now that we're keeping a close eye on. But I think those kind of continued innovations because the CITs are a little less regulated, which also has drawbacks, but I think you're going to continue to see a little bit more innovation in that space. And that's also going to, I think, continue to propel them.

Dziubinski: You mentioned drawbacks. And while innovation is a great thing and of course lower costs are a great thing, what are some of the drawbacks, if any, for plan participants that are starting to see some of those assets go toward CITs?

Kephart: There's less required transparency around CITs than there are on mutual funds. That's kind of the drawback of not being under the Investment Company Act of 1940. So, CITs aren't required to disclose their manager names, which is a very key part of information that I think anyone would want to know. So, I think the amount of information you're getting on your CITs can vary a lot by your plan sponsor and which firm is providing that CIT. So, you could have a lot of different experiences. But I think until you're able to really easily compare CITs the way you can compare mutual funds and ETFs, you know, that's really the bar that we should be pushing CITs forward.

Dziubinski: Well, Jason, thank you so much for your time today helping us walk us through what we're seeing with CITs and why we might be seeing more of it going forward.

Kephart: Thanks for having me.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

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About the Authors

Jason Kephart

Director, Multi-Asset Ratings
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Jason Kephart, CFA, is director of multi-asset ratings for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for Morningstar’s multi-asset ratings methodology and shares responsibility for research priorities. Kephart leads the firm’s global and North American multi-asset ratings committees. Kephart regularly contributes to Morningstar’s thought leadership on target-date strategies, 60/40 portfolios, model portfolios, and other multi-asset outcome-based products. He has been the lead analyst for multi-asset strategies from firms such as Vanguard, BlackRock, T. Rowe Price, and Dodge & Cox.

Before joining Morningstar in 2014, Kephart spent seven years as a journalist for InvestmentNews, Fund Action, and SmartMoney, reporting primarily on the mutual fund and exchange-traded fund industries.

Kephart holds a bachelor’s degree in English from Florida State University. He also holds the Chartered Financial Analyst® designation.

Susan Dziubinski

Investment Specialist
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Susan Dziubinski is an investment specialist with more than 30 years of experience at Morningstar covering stocks, funds, and portfolios. She previously managed the company's newsletter and books businesses and led the team that created content for Morningstar's Investing Classroom. She has also edited Morningstar FundInvestor and managed the launch of the Morningstar Rating for stocks. Since 2013, Dziubinski has been delivering Morningstar's long-term perspective and research to investors on

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