CITs in the 401(k) Field: The Price of Change

CIT’s are an essential part of most 401(k) plans nowadays, and they’re even becoming available for smaller plans, and more widely used among plan sponsors. According to the Cerulli Associates’ research, plan sponsors’ pursuit of lower-cost alternatives, lead to CIT’s gradually capturing the mutual funds’ market share in the beginning of 2021.

The key benefit of using CIT’s in 401(k) plans is cost-efficiency; plan sponsors are looking for ways to save as many  basis points and as possible , by choosing CIT’s rather than similar mutual funds.  Although they are, technically speaking,  functionally identical, CIT’s are often less expensive than their more traditional equivalents.

CIT’s are also getting more popular than target-date mutual funds. As an earlier publication by Morningstar showed, around 43% of all target-date assets in 2020 were invested in CITs, which is a significant increase from less than 20% of target-date assets that had been invested in CIT’s, back in 2014.

CIT’s are becoming more widely available, as they’re now also included in many smaller retirement plans.

But there are several disadvantages that still prevent advisors from confidently recommending them to their clients:

  1. CIT’s have lesser regulatory requirements, which makes them less transparent for employees and consultants to use.
  2. On the other hand, CIT’s have greater due diligence requirements from plan sponsors and advisors, which makes it harder to benchmark them and review the advisors’ services and fees.
  3. CIT’s don’t have the same portability as mutual funds, as plan participants are first required to liquidate their CIT’s to cash before they could roll them over to a qualified account.

All that being said,  it is clear that the implementation of CIT’s is on the up  for a reason. However there are still some legitimate obstacles that make using these new opaque investment vehicles difficult to invest in, so many advisors would still prefer more classical options to CIT’s.

With the deep investment analytics tool called 401kFiduciaryOptimizer developed by RiXtrema, you can easily compare mutual funds to CIT’s (and vice versa), and find the best low-cost alternatives with better performance, and then compose a comprehensive report for a plan sponsor you’re working with, or win a new prospect.

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