There’s a stealth investment vehicle that has made its way into many large company 401(k) retirement plan menus over the last few years. It’s called a collective investment trust (CIT). You might own one or more of these company 401(k) investment options right now and not even know it.
Collective investment trusts are very similar to traditional mutual funds. They own baskets of securities. But they aren’t subject to the same disclosure rules and other requirements as mutual funds.
Your company 401(k) retirement plan sponsor has been advised to offer CIT’s on your company retirement plan menu of options by your company 401(k) retirement plan provider (Schwab, Fidelity, Vanguard, etc.).
If your company offers lower cost CIT’s, they are less likely to be sued regarding the high cost of their company 401(k) retirement plan mutual fund options.
The primary attraction to your company 401(k) retirement plan sponsor (your company) is that CIT’s have lower annual fees. Recent lawsuits filed by retirement plan participants have forced company 401(k) retirement plan sponsors to lower annual company 401(k) mutual fund fees as much as possible.
Collective investment trusts are typically a little less expensive to own than regular mutual funds. But those lower costs come with another set of concerns for individual company 401(k) retirement plan participants.
Company 401(k) retirement plan advisors represent the best interest and legal exposure of the company. The company 401(k) retirement plan advisors to your company never think about, or care about, how a CIT might affect the individual company 401(k) retirement plan participants.
Who represents you, as a company 401(k) retirement plan participant?
CIT’s don’t have a ticker symbol. That means that you can’t easily follow the daily price movements. Instead, you’ll have to log in to your account on the website of the financial company that administers your 401(k) plan.
I have seen company 401(k) CIT’s that are invested in less than 10% increments of over a dozen separate mutual funds. One single CIT represents ownership in more mutual fund positions than an institutional investor is capable of managing.
Much more of a concern is the fact that you will have a hard time being able to determine a collective trust has performed compared with an index benchmark or other company 401(k) mutual fund options.
CIT’s are pooled investments. You can’t use an independent, third-party investment management research database in order to monitoring investment performance.
Would you buy a house knowing that you could not know the market value when you decide to sell? Would you buy a car knowing that “the market” would determine the trade-in or resale value?
CIT’s options offered on your company 401(k) retirement plan menu are only intended to keep your company 401(k) retirement plan sponsor out of fiduciary jail regarding annual company 401(k) mutual fund fees.
It’s great that CIT’s are lower cost company 401(k) menu options. But be very aware of what you give up as an owner of a CIT in your company 401(k) retirement plan account.
Ric Lager
lager & Company, Inc.
