Many of us will look into our employer provided 401k plans and find something labeled “SSgA S&P 500 Index SL-III” and wonder: What is this? We can find no ticker for this “fund” and can find nothing about it in the newspaper’s daily mutual fund listings. We cannot find it on Morningstar.
We can rest easy, as this strange looking entity is what is known as a Collective Investment Trust (henceforth CIT), a pooled investment account very similar to a mutual fund. They are common offerings in both defined benefit and defined contribution plans.
In fact, the federal employees Thrift Savings Plan, one of the largest defined contribution plans in the US, uses collective investment trusts for some of the plan’s investment portfolios.
CITs date all the way back to 1927. In 1936 Congress amended the Internal Revenue Service Code to provide tax-exempt status to certain bank CITs. In 1955 the Federal Reserve authorized banks to combine funds from pensions, profit sharing and stock bonus plans and the IRS determined that such funds could be exempt from tax. As a result, CITs became the popular choice for defined benefit plans.
In 2000 the National Securities Clearing Corporation added CITs to its mutual fund trading platform, allowing CITs to trade daily and as fluidly as mutual funds. The Pension Protection Act of 2006 approved CITs as default investment options for defined contribution plans. As a result, CITs have become a larger component of the defined contribution plan product menu.
Unlike a mutual fund that issues a prospectus and regular reports, a CIT spells out the terms and guidelines under which the investments of the trust are managed in a Declaration of Trust. There are no annual or semiannual reports. Unlike a mutual fund, a CIT has no ticker designation. This means that CITS are more difficult for an individual to track, since they cannot be downloaded into on-line portfolio trackers, and daily net asset values and investment results are not listed in newspapers.
While Morningstar provides a proprietary database of CIT performance data for more than 1000 US collective trusts, this service is only made available to institutional investors, consultants, retirement plan sponsors, endowments, and foundations and is not available to individual investors.
The company contributory plan will usually provide the planholder with factsheet disclosure and performance information. If your CIT fund is an index tracker, such as an MSCI EAFE index portfolio, you can judge its performance by seeing how closely the fund tracks its benchmark index.
No dividend and capital gains distributions
A CIT, unlike a mutual fund, does not make dividend or capital gains distributions. Dividends and capital gains are accumulated in the trust’s net asset value.
CITs are not regulated by the Investment Company Act of 1940 but are regulated by the Office of the Comptroller of the Currency (“OCC”) and subject to oversight by the Internal Revenue Service (“IRS”) and the Department of Labor (“DOL”). CITs are required to have an annual independent outside audit.
The lower burden of regulatory compliance costs and the total lack of retail investors means that CITs have lower costs than the average mutual fund. However, Vanguard, which manages both mutual funds and CITS, points out in How collective trusts stack up against institutional funds that CITs can be more expensive than institutional index mutual funds.
Some major issurers of CITs
Here are some links to publicly available information on CITs managed by major players in the market.