CIT’s (Collective Investment Trusts) in 401(k) – The Good and the Bad

Collective Investment Trusts (CIT’s) can be helpful to a 401(k) plan and its participants, or it can cause harm.

There is a general assumption that CIT’s are regulated by the Federal Government Office of Comptroller of the Currency (OCC).  Some CIT’s are regulated by the OCC while many others are regulated by one of 50 state bank regulators.   This allows CITs to choose their own state regulator who may have the most lax oversight. 

Many of the most popular CITs in 401(k) have been shown to be superior to mutual fund versions as being identical in holdings but lower fees.   Some plans have been sued for using higher priced mutual funds when identical lower cost CIT’s were available.  The largest target date funds of Vanguard, Fidelity, and T.Rowe Price all have identical CIT funds to their SEC regulated Mutual funds which I believe are a better fiduciary choice. 

Stable Value Funds are currently not offered in mutual funds, so CIT’s have been the best avenue for many plans to deliver synthetic based stable value.   Most of the best Stable Value CIT’s are in the Heuler Pooled Universe, and include the SV CIT’s of Vanguard, Fidelity, T.Rowe Price, Invesco, Galliard.   Of course, even among this group fees vary. 

Most synthetic Stable Value CIT’s have been run adequately with one exception.  A JPM stable value CIT used a JPM broad bond CIT, which put in another JPM CIT with a Private Equity like structure technically private debt.  This Private debt blew up during the 2008 financial crisis and this has cost JP Morgan over $400 million in damages in 401(k) litigation.[i] [ii]   

However, I fear that CIT’s will be used to hide high fee high risk investments in the guise of improving return or risk.

In my previous paper “Private Equity in 401(k) -a Fiduciary Time bomb”[iii] I outline the excessive fees, massive risks and unproven performance in that asset class which also applies to private debt and other alternatives.

The other high fee high risk investment that has been and will continue to be hidden in CIT’s are annuities.   I touch on all the fiduciary flaws in annuities including general account stable value plus the 200 basis points in hidden fees[iv]   

This type of layering from JPM is what I expect to see in Target Date CIT’s with annuities, private equity, private debt and other alternatives especially in weakly state regulated CIT’s.   I fear state regulators will allow in risky high fee complex investments they do not even understand, to appease Wall Street managers.

Even a small allocation of alternatives ie Private Equity or annuities to a Target Date CIT or Stable Value CIT , with the excessive risk, lack of outperformance and excessive fees make it a Fiduciary Risk.

If you have underlying alternatives or annuities or are seriously considering it in a CIT, get an independent legal opinion that the actual underlying Annuity and Private Equity contracts pass ERIA fiduciary muster.   Make sure your fiduciary liability insurance cover Annuities and Private Equity- many do not.

CIT’s with a strong Federal regulator like the OCC are preferable.  However, some state regulated CIT’s which are exact clones of SEC registered mutual funds are probably OK.   Fiduciaries need to dig down to the security level of every CIT to make sure there are no hidden risks and fees.


[i] https://www.nytimes.com/2012/03/23/business/jpmorgan-discloses-it-lost-in-arbitration-to-american-century.html

[ii] https://casetext.com/brief/whitley-v-jp-morgan-chase-co-et-al_memorandum-of-law-in-opposition-re-49-motion-to-dismiss-first-amended

[iii] https://commonsense401kproject.com/2022/02/15/private-equity-in-401k-plans-a-ticking-time-bomb/

[iv] https://commonsense401kproject.com/2022/02/10/401k-lifetime-income-a-fiduciary-minefield/

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