401(k) Specialist Issue 1 - 2018 - 37

INVESTMENTS
" While it has always been
important for fiduciaries to consider
CITs because of the many benefits
they provide to participants,
today's 401(k) fee litigation is
making it essential for fiduciaries
to give CITs a hard look. "
we can, CITs are a natural way to continue
to carve down expenses whenever they are
not necessary. "
The main difference between a CIT and
a mutual fund is that the CIT involves a
direct relationship between the sponsor and
the manager of the fund, he continued. The
plan sponsor must sign an investment management
agreement, as opposed to buying
a registered product like a mutual fund
where they simply accept the terms of the
prospectus.
Like GRP's Giles, Glasgow noted that
CITs have come down-market in recent
years-good news for advisors looking to
access the product-and that in certain areas
they're mirroring their registered investment
counterparts.
" It used to be that you would go to a
manager and say, 'Well, you run this fund,
and I would like that same investment
option in a CIT format. We are going to
negotiate a fee between you and me and it's
going to be something less than what the
mutual fund is charging because you don't
have all these regulatory requirements that
you have with the mutual fund,' although
you have some obviously, since there is still
oversight. "
Also referencing aggregators, Glasgow
added that many have negotiated standard,
level fee structures on various investment
products that allow cost savings to be passed
to the end consumer.
" So, you have a CIT that might actually
have a CUSIP number, which is much like a
mutual fund, and that CUSIP number says,
'Okay, if you get this CIT, what you're getting
is this portfolio in a bank trust wrapper
as opposed to a mutual fund wrapper. The
fees on that are X, Y or Z. In some cases,
you'll get some different flavors, with maybe
some that allow securities and others that
don't. If you have enough size and scale, all
that can be negotiated directly. "
It all sounds so great-essentially the
same product with lower fees and therefore
potentially better performance. So why, if
the necessary CIT size and scale is achieved,
go with a mutual fund at all?
Transparency for one, although it's something
Glasgow then immediately dismissed.
" You hear arguments about being able to
see them as registered products with ticker
symbols. I find that to be, in today's day and
age, pretty irrelevant. Most of your participants
access data via the Internet in one way
or another, and so the CIT doesn't have the
necessity of that ticker symbol per se. "
There are instances where the mutual
funds are less expensive than CITs, he noted,
usually when a mutual fund has a large
number of assets, whereas the CIT doesn't,
" but you have to look at each case by case. "
Coming full circle, he concluded with the
substantial CIT growth to come.
" The regulatory hurdles of having a mutual
fund are still high enough that, if there
is enough scale in the CIT in general, it's
going to be a less expensive way to access
the same investment product. It's not always
the case, but in general. "
60%
expect more of their
plans to offer CITs in the
next five years
83%
of employers are
concerned about the
current increase in
litigation pertaining to
investment selection
and fee reasonableness
47%
of advisors feel
plan sponsors don't
understand CITs
83%
of plan sponsors are
not asking for more
information on CITs
ISSUE 1 2018 | 401kSpecialist.com
37
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401(k) Specialist Issue 1 - 2018

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