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Should you use a Collective Investment Trust?

Most investors are familiar with mutual funds and retirement savings vehicles like 401(k)s. But a collective investment trust (CIT) combines some of the characteristics of both. While CITs are similar to mutual funds, they’re generally only available to participants in employer-sponsored retirement plans. Learn more about CITs, from their benefits and drawbacks to how they differ from mutual funds, and who they make the most sense for financially.

Collective Investment Trusts: The Basics 

Collective investment trusts, also known as CITs, are a type of tax-exempt pooled investment vehicle. CITs generally consist of assets pooled from certain retirement plans, such as 401(k)s or other types of government plans. These assets are then pooled to create a larger and more diversified investment portfolio. They can invest in a variety of securities, such as stocks, bonds and even mutual funds. There’s no limit as to the number of investors in a CIT. Collective investment trusts are maintained by a bank or other trust company, called the trustee.

However, there are a few things to keep in mind when investing in a CIT. First, they are not regulated by the Securities and Exchange Commission (SEC), though they do fall under the regulatory power of the Office of the Comptroller of the Currency (OCC). This means they are less regulated as far as investment vehicles go. CITs are also not FDIC-insured. Investors with individual retirement accounts (IRAs), non-qualified deferred compensation plans or 403(b) plans may not have access to a CIT.

Benefits and Drawbacks

Should you use a Collective Investment Trust?

Perhaps the biggest benefit of utilizing a collective investment trust is access to a more diversified investment portfolio. Remember, it’s made possible since the retirement funds of many different investors are pooled and invested.

CITs also provide investors with a certain degree of flexibility, in that they can save for retirement using a CIT and other investment vehicles, such as a mutual fund. (More on that later.) Additionally, CIT investors are privy to daily valuations and processing, as well as greater and more advanced data reporting.

Additionally, CITs tend to have lower management fees than say a mutual fund because of the lack of SEC regulation. This, combined with tax-free earnings, means that CITs can help you gain the biggest bang for your investment buck.

One drawback of CITs is that they aren’t available to all investors. Rather, they are only used by those with a qualified, employer-sponsored retirement plan. Another con may be that CITs can’t be rolled over into an IRA or another account.

And since CITs are private funds rather than public ones, they aren’t required to report portfolio holdings or release shareholder funds. Consider this and the fact that they aren’t FDIC-insured or regulated by the SEC and you may decide to proceed with caution when investing in CITs. Though it must be noted that they do operate under their own set of regulatory rules and have become quite mainstream in recent years.

CITs vs. Mutual Funds

While CITs and mutual funds are often compared – for one, they are both pooled investment vehicles with a defined objective – there are a few important differences to note.

First, mutual funds are available to most investors, while CITs are limited to those with a qualified employer-sponsored retirement plan. Mutual funds are regulated by the SEC, while CITs fall under the OCC. And perhaps most importantly, CIT fees tend to be lower and are negotiable, while mutual funds’ fees can be higher and aren’t subject to negotiations.

Their management structures also differ. CITs are managed by a bank or trust company, while mutual funds are managed by an asset management company.

However, both mutual funds and CITs employ daily valuations, and of course, are a type of pooled investment fund. CIT usage has also increased in recent years, while mutual funds’ have seen a decrease in use. This speaks to the increasing popularity of the former.

The Bottom Line

Should you use a Collective Investment Trust?

Collective investment trusts may be a good fit for investors looking to diversify their portfolio, particularly the money they’re saving and investing for retirement. While they’re only available to those with qualified employer-sponsored retirement plans, CITs offer similar benefits to those of a mutual fund. Since CITs aren’t regulated by the SEC, they may not be the right fit for everyone. Do your research and consider all of your options to pick the best investment strategy for your financial goals.

Tips for Investors

  • CITs are a type of pooled investment fund available only to investors with a qualified employer-sponsored retirement plan. If you’re saving and investing for retirement, consider using a retirement calculator to help you stay on track.
  • If you’re not sure how to diversify your portfolio, a financial advisor may be able to help. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

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Rachel Cautero Rachel Cautero writes on all things personal finance, from retirement savings tips to monetary policy, even how young families can best manage the financial challenges of having children. Her work has appeared in The Atlantic, Forbes, The Balance, LearnVest, SmartAsset, HerMoney, DailyWorth, The New York Observer, MarketWatch, Lifewire, The Local: East Village, a New York Times publication and The New York Daily News. Rachel was an Experian #CreditChat panelist and has appeared on Cheddar Life and NPR’s On Point Radio with Meghna Chakrabarti. She has a bachelor’s degree from Wittenberg University and a master's in journalism from New York University. Her coworkers include her one-year-old son and a very needy French bulldog.
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