What is a CIT?

Understanding Collective Investment Trusts

Key Takeaways:

• CITs are an increasingly attractive investment option within retirement plans.
• CITs share many similarities with mutual funds but do have some unique advantages.
• When reviewing investment options considering CITs is a prudent fiduciary decision.

Comerica has been offering CITs for over 40 years and our industry leading customer service helps hundreds of clients with their CIT needs. A collective investment trust (CIT), also called a collective investment fund (CIF), is a tax-exempt pooled investment vehicle. A defining feature for CITs is the sponsorship and maintenance that a trust company or trustee bank provides — such trusts must be held by these institutions. CITs can be an especially attractive investment option, as they are both comparable in many ways to mutual funds but also offer some unique and potentially valuable differences. Below is a closer look at this unique investment vehicle, including distinguishing factors and key benefits.

A collective investment trust (CIT), also called a collective investment fund (CIF), is a tax-exempt pooled investment vehicle.

Defining and Understanding Collective Investment Trusts

CITs can only be included in retirement accounts qualified by the Employee Retirement Income Security Act of 1974 (ERISA). As opposed to certain other types of retirement investments, such as mutual funds, an individual investor cannot generally make a direct purchase of a CIT. Instead, their employer must offer a plan that incorporates this type of trust. This option is popular for defined contribution retirement plans, such as 401(k) plans.

The trust companies and trustee banks that own and manage CITs use the combined power of investor funds placed into retirement plans to purchase a variety of securities, thereby creating a single investment option. The large-scale nature of these plans supports a diversification of assets, which is often attractive to individual investors. A CIT may include stocks, bonds, commodities and a wide range of other securities.

Key Dates in the History of CITs

• 1927: The first collective investment trust launches.¹
• 1936: Internal Revenue Service code is amended to provide tax-exempt status to certain CITs.¹
• 2000: CITs begin trading on the National Securities Clearing Corporation (NSCC) platform, broadening availability.²
• 2019: Nasdaq registers the first CIT tickers on their fund network.³

CITs and Mutual Funds

In broad terms, on the level of individual investors seeking out effective vehicles for retirement, a CIT is generally similar to a mutual fund — at least until a closer look is taken at these two options for retirement investing. Here are some similarities and differences:

Common qualities shared by CITs and mutual funds:

• Pooled vehicles: Investors who take part in these investment options have the ability to invest in diverse assets which would typically be out of reach for a single investor.
• NSCC traded: Share prices for both CITs and mutual funds are updated daily. Investors can access real-time information about contributions, distributions and other activity, as well as view changes from one day to the next.
• Sub-advised by professional money managers: CITs and mutual funds each incorporate the guidance of an experienced third-party financial professional. These investment managers may offer their strategies as a CIT and/or a mutual fund. Their expertise supports effective investment decisions.
• Inclusive of multiple share classes: Both investment vehicles may offer multiple share classes allowing for a variety of expense structures. Interestingly, a CIT can own shares of a mutual fund but not vice versa.
• Configured to offer quarterly fact sheets: Investors receive in-depth information and analysis about fund performance, helping them make more informed decisions and understand potential opportunities and risks.
• Highly regulated: Although the specific regulatory body and level of regulation differ — a concept to be explored in the list of key differences below — mutual funds, as well as CITs, are both held to standards of federal government agencies.
  

Key Differences That Distinguish CITs and Mutual Funds:

• Regulation by the OCC and state banking regulators: Mutual funds fall under the purview of the Securities and Exchange Commission (SEC). In contrast, the Office of the Comptroller of the Currency (OCC) and state-level banking regulators oversee CITs. This leads to a key advantage of CITs: reduced administrative and operational costs.
• Operational costs and management fees: The SEC requires mutual funds (and other entities it oversees) to complete certain processes as part of its regulatory duties, such as compiling and issuing a prospectus or creating a board of directors that is independent of the fund. This increases the cost of operating the fund, which is passed along to individual investors. The OCC offers similar strong oversight over CITs per its regulations. While administrative and management costs are still present, they are generally lower than that of mutual funds.
• More operational flexibility: In general, CITs can be more flexible than mutual funds when it comes to the types of investments that can be included. This offers the possibility of better results than a more restrictive mutual fund.

The Benefits of a CIT for Retirement Investing

Collective trusts combine many of the features that make mutual funds successful with some specific and unique advantages. CITs typically offer lower costs and additional investment flexibility with similar regulation compared to mutual funds.

With increased scrutiny on defined contribution plans, CITs can present a compelling opportunity to broaden investment options and potentially lower costs.

Want to Know More?

For more information about this topic or any other, Comerica welcomes the opportunity to help. Contact your Comerica Relationship Manager or contact Comerica to request to speak with a Comerica Professional.

¹Comptroller’s Handbook: Collective Investment Funds. OCC.gov. (2015, June 25). https://www.occ.treas.gov/ publications-and-resources/publications/comptrollers-handbook/files/collective-investment-funds/indexcollective-investment-funds.html
²Securities and Exchange Commission. (n.d.). https://www.sec.gov/files/rules/sro/nscc/34-49422.pdf
³Wilmington Trust and Nasdaq Fund Network provide first publicly searchable ticker symbols for collective investment trusts (CITs). (n.d.). Nasdaq. https://www.nasdaq.com/press-release/wilmington-trust-and-nasdaqfund-network-provide-first-publicly-searchable-ticker#:~:text=NEW%20YORK%2C%20Sept.%2016%2C% 202019%20%2FPRNewswire%2F%20--%20Nasdaq,retail%20investment%20transparency%20to%20the% 20world%27s%20financial%20markets202019%20%2FPRNewswire%2F%20--%20Nasdaq,retail%20investment%20transparency%20to%20the% 20world%27s%20financial%20markets