PLANADVISER - September/October 2018 - 52

investment oriented
How to
Explain
CITs to
Sponsors
In this day of hyperlitigation,
these l owcost
funds deserve
a closer look
C
ollective trust funds (CTFs),
or collective investment trusts
(CITs), are pooled investments
and, in the U.S., predate mutual funds.
Created and managed by banks and
trust companies, they saw some use
in the first 401(k) plans, but " early on,
collective trusts involved tons of paperwork,
required high minimum investments,
and performance was a mystery
for participants wanting information, "
says Greg Porteous, head of DC [defined
contribution] intermediary strategy at
State Street Global Advisors in Boston.
As the defined contribution industry
grew, plan sponsors found mutual
funds to be a more convenient, readymade
solution for investing millions of
small contributions from employees' pay.
But much has changed, Porteous says. " The paperwork
has been simplified. Performance reporting is reliable, and
lower minimums make CTFs available to smaller plans. The
real catalyst, about 10 years ago, was the trading of CTFs on
NSCC [National Security Clearing Corp.]-the same platform
[as] for mutual funds. " Fund researcher Morningstar now
maintains a database on 2,500 U.S. CTFs, with assets of $4.8
trillion. Porteous adds, " We see a lot more inquiries [about
CTFs] from advisers serving small to midsize DC plans. "
CTFs are structured somewhat differently than mutual
funds, and, for plan sponsors and their advisers, they may
take some getting used to. Yet, they offer several potential
advantages over their mutual fund competitors.
CTFs can provide greater returns on their underlying
investments, by making the assets work harder. " [They] are
institutional DC accounts, and, because the fund flows are
steadier, there is not a lot of 'hot money,' as there can be
in some mutual funds, " notes David O'Meara, senior investment
consultant at Willis Towers Watson in New York City.
" A more stable asset base allows portfolio managers to hold
less idle cash, so there is less cash drag on portfolio returns. "
Slower turnover of assets also reduces trading costs, he says.
CTFs also are able to cross trades within their portfolios,
Porteous explains. " Many trades don't have to go out
to the market, avoiding some transaction costs. " He points
out that, from 2000 through 2015, State Street was able to
handle, internally, 85% of the trades in its Standard & Poor's
(S&P) 500 Index fund and 73% in its MSCI EAFE Index fund.
There is more: " In general, DC plans are tax-deferred, but
when a fund buys international stocks, there are taxes to be
paid on the dividends, " Porteous says. " Collective trusts pay
52 | planadviser.com September-October 2018
Art by Daniel Špacek
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