If you still aren't familiar with collective investment trusts, you should be — particularly since they're sufficiently misunderstood to give rise to a number of myths about their structure and use.
The province of qualified retirement plans, CITs are also known as commingled trusts or collective trust funds. Actually, they're pooled investment funds that are administered by banks and trust companies.
According to the Coalition of Collective Investment Trusts, CITs are "becoming as easy to use as mutual funds and may be a valuable tool in developing a retirement plan lineup," but for them to have value to you, you'll have to be able to separate the myths from the facts.
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The coalition has put out a list of said myths and the facts that you should know instead. Here are eight of them.
1. Myth: CITs are exactly like mutual funds.
Only mutual funds are "exactly" like mutual funds, but there are some similarities. The coalition points out that CITs are generally cheaper than mutual funds, thanks to lower administration, marketing and distribution costs. In addition, they can be more flexible on price.
2. Myth: CITs have a lower level of regulatory oversight than mutual funds.
No, it's not a free-for-all out there in CIT-land. They might be exempt from SEC registration, but that doesn't mean they don't have to follow other regulations — both federal and state. And if ERISA funds are invested in them, they're subject to ERISA and DOL laws, too.
CITs also have to comply with an assortment of IRS rules to keep their "group trust" tax-exempt status, in addition to having to follow other rules regarding who sponsors and maintains them, who serves as their primary regulator, and a bevy of other marketing, investing and auditing regulations.
3. Myth: Undocumented CITs lead to uninformed decisions.
No, it's not true that they don't have any documentation. While they lack prospectuses, which mutual funds have, CITs have a Declaration of Trust, and most also have a fund offering document that can be known under a variety of names: Fund Disclosure, Fund Description or Statement of Characteristics.
These may not be quite as convenient as a mutual fund prospectus, but investors can find similar information on which to base their decisions in these other documents.
4. Myth: High account minimums put them out of reach for all but the biggest plan sponsors.
Not true. Some do have higher minimums than the run-of-the-mill mutual fund, but others, says the coalition, "have very small minimum investment amounts."
Even with higher minimums, a plan's recordkeeper may be able to offer options that will allow small and medium plans to be able to use CITs without having to comply with minimums.
5. Myth: Very few plans can use CITs.
Not so, again. Among the types of plans that can use CITs if they so desire are "401(k), profit-sharing, pension, stock bonus, thrift, money-purchase, governmental retirement, cash balance and certain Puerto Rico retirement plans. Under certain circumstances, CITs may accept investments from church plans."
6. Myth: Without daily trading, CITs aren't appropriate for DC plans.
Ah, but they are traded daily — at least the vast majority of them are these days. Complete with daily prices.
7. Myth: Not enough asset classes.
Times have changed, bucko. Now CITs span a range of asset classes — everything from domestic and international equity to fixed income, stable value and alternatives. Passively and actively managed, too.
Oh, and did we mention they're popular now in glidepath and target-date funds?
8. Myth: No data.
The data is there — in specific CIT databases available from vendors like Morningstar under licensing agreements. It's true that the level of available data on CITs can't yet match that available for mutual funds, there's more available than formerly, and it's increasing.
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