Use of Collective Investment Trusts as a Retirement Plan Investment Vehicle
When considering appropriate investments for retirement plans, all types of investment vehicles should be considered. One investment option is a Collective Investment Trust (CIT). CIT’s are fast growing in popularity in the retirement and pension marketplace.
A Collective Investment Trust, sometimes referred to as commingled funds or collective trust funds, are bank-administered trusts that hold pooled assets of various trust accounts with similar objectives into a single portfolio. A CIT is managed and operated according to each trust’s governing documents called the “Declarations of Trust”. The bank acts as a fiduciary for the CIT and holds legal title to the trust assets whereas participants in a CIT are the beneficial owners of the trust assets. Overall, the commingling or pooling of assets lowers fees associated with investing in fiduciary assets and enhances risk management and investment performance for the participating accounts.
Unlike mutual funds, eligible investors of CITs only include certain qualified retirement plans. Accordingly, CITs may only admit eligible assets and may not hold assets of 403(b) plans, individual retirement accounts (IRA) or health savings accounts (HSA). Investments in a CIT are neither insured by the Federal Deposit Insurance Corporation (FDIC) nor are subject to potential claims by a bank’s creditors.
An important feature of a CIT is that the capital gains and income received by the CIT are ordinarily not subject to federal taxes. Although tax-exempt, CITs are treated as a separate tax entity from participant accounts. Since 2000, CITs have operated more similarly to mutual funds. CITs now offer automated subscription and withdrawal transactions and continue to receive expanded coverage from data aggregators.
CITs are subject to laws and regulations of state and federal bank regulatory agencies. Additionally, Collective Investment Trusts are subject to ERISA and the DOL, in which transactions must comply with ERISA’s prohibited transaction rules. To qualify for “tax-exempt” treatment, CITs must also operate in conformance with IRC revenue rule 81-100. Moreover, the sale of CITs by a broker-dealer may subject the CIT sponsor to FINRA rules. The SEC also governs investment advisers’ activities to the extent that a bank employs a sub-adviser to assist it in its exercise of investment discretion. However, most CITs are not required to register under the federal securities laws if the fund qualifies for specific exemptions of the Securities Act of 1933 (the ’33 Act) and the exclusions provided in the Investment Company Act of 1940 (the ’40 Act).
Several factors have helped increase the popularity of CITs as an investment vehicle for institutional investors and qualified retirement plans. Ultimately, retirement plan fiduciaries must gauge all types of investment vehicles that they consider in fulfilling their suitability and fiduciary obligations.
Are you considering adding a Collective Investment Trust to your RIA or Fund product portfolio? Reach out to our sales team for guidance with procedure and policy updates, employee training, and updates to Form ADV brochure, and accounting. (818) 657-0288.
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