The role of an advisor or consultant when working with clients is to help in selecting and monitoring collective investment trusts (CITs). Since this arena is still an emerging environment, not all asset managers have access to CITs. By working with plan sponsors, advisors can add value by introducing CITs for all investment options, which includes the cost structure differences between CITs and mutual funds.
Hiring a service provider to hold and manage plan assets, whose fees are paid with plan assets, is a fiduciary decision and should be made prudently. Prudence requires fiduciaries to consider relevant information (or that which they should know to be relevant) in order to make a well-informed decision.1
For a meaningful comparison, the Department of Labor (DOL) urges plan sponsors (with the help of a knowledgeable advisor) to survey service providers by providing them with complete and identical plan information as well as the services they are seeking.2
Plan sponsors should “ask service providers about their services, experience with employee benefit plans, fees and expenses, customer references, or other information relating to the quality of their services and customer satisfaction with such services.”3
The DOL also recommends gathering:
- Information about the firm itself: The financial condition and experience with retirement plans of similar size and complexity
- Information about the quality of the firm’s services: The identity, experience, and qualifications of professionals who will be handling the plan’s account, any recent litigation or enforcement action that has been taken against the firm, and the firm’s experience or performance record
When selecting CITs, advisors should help plan sponsors understand:
- The depth of the organization sponsoring: Is the CIT sponsored by an asset manager’s special purpose trust company or a third-party trust company? What is the internal expertise of the group sponsoring the CIT?
- The CIT sponsor’s corporate structure: Is the bank or trust company a wholly owned subsidiary of a larger conglomerate where the parent may be shielded from liability associated with the CITs?
- The risk and compliance structures of the CIT sponsor: Are the CITs susceptible to mismanagement?
- The governance structure of the CITs: How does the sponsor monitor investment subadvisors?
- The regulatory framework: Is the CIT overseen by a state agency or the Office of the Comptroller of the Currency?
- The disciplinary history of the CIT sponsor: Has the CIT trustee been subject to regulatory violations or litigation in a way that should be a red flag for plan sponsors?
When evaluating the service providers’ responses, advisors and plan sponsors should consider the nature and scope of the proposed services to ensure the arrangement is necessary and reasonable. Advisors can assist plan sponsors with reviewing the CIT documents to help ensure they meet the requirements of ERISA Sec. 408(b)(2).4
According to the DOL, “Fees and expenses are one of several factors to consider when you select and monitor plan service providers…The level and quality of service…will also affect your decisions.”5 Fiduciary decisions are evaluated based upon the process used to determine whether or not the services are necessary and reasonable in light of the value delivered to the plan (and its participants) by the provider.
In addition to ensuring the plan sponsor has the proper information for 408(b)(2) purposes, another critical aspect to evaluate is the degree to which the CIT sponsor is able to assist plan sponsors with meeting their duties to disclose investment- and fee-related information to plan participants under DOL Reg. 404a-5 (the Participant Fee Disclosures). This regulation requires plan sponsors to disclose specific information concerning performance and expenses associated with the plan’s designated investment alternatives (DIAs) at least annually, as well as the location of a website where participants can get more current information updated at least quarterly.
To assist plan sponsors in meeting their requirements to provide the Participant Fee Disclosures, DOL Reg. 408b-2 requires services providers, to offer identifying information such as the name and type or category of the alternative, performance data, benchmarks, and fee and expense information with respect to which the return is fixed. The CIT will also need to disclose the annual operating expenses of the fund and all compensation charged against the fund. The CIT already is required to disclose to the plan sponsor the fee and expense.6 Advisors should be prepared to gauge the extent to which the CIT sponsor is capable of providing such information in a timely and accurate fashion.
Learn more about CITs as investment vehicles in defined benefit and defined contribution plans, what a CIT is (and what it isn’t), the factors that are driving their adoption, and myths surrounding CITs.
1 29 C.F.R. §2550.404a-1(b)(1)(A)(i).
2 See, DOL Tips for Selecting and Monitoring Services Providers for Your Employee Benefit Plan. Available at www.dol.gov
3 DOL Meeting Your Fiduciary Responsibilities. Available at www.dol.gov
4 29 C.F.R. §2550.408b-2.
5 Department of Labor, Understanding Retirement Plan Fees and Expenses. Available at www.dol.gov
6See, 29 C.F.R. §2550.408b-2(c)(1)(iv)(E)(3). This includes the following additional investment information about a the CIT investment funds which are designated as an investment alternative (an “alternative”): provide identifying information such as the name and type or category of the alternative (29 CFR 2550.404a-5(d)(1)(i)); performance data (29 CFR 2550.404a-5(d)(1)(ii)); benchmarks (29 CFR 2550.404a-5(d)(1)(iii)); and fee and expense information for alternatives with respect to which the return is fixed (29 CFR 2550.404a-5(d)(1)(iv)(B)). The CIT will also need to disclose the annual operating expenses of the fund; and all compensation charged against the fund. The CIT already is required to disclose to the plan sponsor the fee and expense information described in 29 CFR 2550.404a-5(d)(1)(iv)(A)(1) and (2) pursuant to paragraphs (c)(1)(iv)(E)(1) and (2) of the 408b-2 regulation.
This material is for educational purposes only and is not intended as an offer, recommendation or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. There is no assurance that any investment strategy will be successful. The information in this material has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Opinions, estimates and projections constitute the judgment of Wilmington Trust and are subject to change without notice.
There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.
Wilmington Trust, N.A. Collective Investment Funds (WTNA Funds) are bank collective investment funds; they are not mutual funds. Wilmington Trust, N.A. serves as the Trustee of the Wilmington Trust Collective Investment Trust and maintains ultimate fiduciary authority over the management of, and investments made in, the WTNA Funds. The WTNA Funds and units therein are exempt from registration under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended. Investments in the WTNA Funds are not deposits or obligations of or guaranteed by Wilmington Trust, and are not insured by the FDIC, the Federal Reserve, or any other governmental agency. The WTNA Funds are commingled investment vehicles, and as such, the values of the underlying investments will rise and fall according to market activity; it is possible to lose money by investing in the WTNA Funds. Participation in Collective Investment Trust Funds is limited primarily to qualified retirement plans and certain state or local government plans and is not available to IRAs, health and welfare plans, and certain Keogh plans. Collective Investment Trust Funds may be suitable investments for participants seeking to construct a well-diversified retirement savings program. Investors should consider the investment objectives, risks, charges and expenses of any pooled investment company carefully before investing. The Additional Fund Information and Principal Risk Definitions (PRD) contains this and other information about a Collective Investment Trust Fund and is available at https://www3.wilmingtontrust.com/content/dam/wtb-web/pdfs/2021AddtlFundInformationBooklet.pdf or ask for a copy by contacting Wilmington Trust, N.A. at (866) 427-6885.