Subscribe
Share
Share
Embed
A RopesTalk podcast series from Ropes & Gray’s global asset management team that draws on the perspectives of attorneys from all areas of the firm’s broad, integrated practice, and provides insight into essential considerations associated with current and emerging asset management products.
Eric Requenez: Thank you for tuning in today to this Ropes & Gray podcast. My name is Eric Requenez, and I am a partner in the asset management group, based in our New York office. I am joined by my fellow asset management partner, Jessica Reece, who is based in our Boston office, and Josh Lichtenstein, a benefits partner and head of our ERISA fiduciary practice, who is based in New York. In today’s discussion, we will be addressing the rise of collective investment trusts—CITs—particularly alternative-CITs and why they are becoming the preferred vehicle for asset managers seeking to expand into the retirement plan ecosystem and retail market.
Let’s jump in. Jessica, I want to start by level-setting for our audience. Can you explain to our audience what a CIT is and how it differs from traditional mutual funds and private funds?
Jessica Reece: I’d be happy to, Eric. At its core, a CIT is a bank-maintained pooled investment vehicle often referred to as a collective investment fund and offered under a bank’s trust charter. The bank or trust company forms a trust and establishes one or more funds under that trust. The trustee holds legal title, and participating plans hold beneficial interests in the fund and its underlying pool of assets. CITs generally are exempt from registration as an “investment company” under the Investment Company Act of 1940 by way of Section 3(c)(11) of the Act. Instead, banks and trust companies maintain CITs pursuant to authority granted by the Office of the Comptroller of the Currency (“OCC”) and similar banking rules for state banks.
CITs look and feel a lot like mutual funds to ERISA plan fiduciaries and recordkeeping platforms, generally offering daily pricing, unitized interests, and periodic liquidity. But as I just mentioned, they are not SEC-registered, and they generally are available only to certain retirement plans and other institutional investors. They also differ from private funds, which are typically organized as limited partnerships or LLCs offered under Reg D and exempt from registering as an investment company pursuant to Sections 3(c)(1) or 3(c)(7) of the 1940 Act.
Eric Requenez: Thanks Jessica. That’s a great overview. The one thing I’d add is that CITs can invest directly in underlying assets, can be used as a feeder fund into a private or registered fund, and can invest alongside other private funds. I want to drill down a little further regarding eligible investors in these vehicles. Can you walk us through that?
Jessica Reece: Of course. Investors in CITs may include tax-qualified retirement plans—401(k) and other defined contribution plans, pensions, profit-sharing plans—and certain governmental plans and institutional accounts, depending on the trust’s eligibility criteria. Notably, IRAs generally cannot invest directly. Instead, access is typically through plan menus or professionally managed options like target date funds (“TDFs”) within qualified plans.
Eric Requenez: Josh, since CITs are designed for retirement plans, can you explain to our audience how CITs work from an ERISA perspective?
Josh Lichtenstein: Of course. From the ERISA perspective, a CIT is always going to be subject to ERISA and the bank trustee is going to be a fiduciary, and ERISA’s prohibited transaction rules will apply when plans invest. CITs also have special rules that provide them with greater flexibility than other types of funds to deal with some of those prohibited transactions. In particular, Section 408(b)(8) of ERISA is a key exemption that allows plan investments into bank-maintained CITs, provided that the bank receives no more than reasonable compensation and the plan’s governing instrument or an independent fiduciary expressly permits an investment of this type, which is typical. ERISA’s fiduciary duties of prudence and loyalty are going to apply as always, of course, and the processes in place around fees, disclosures, valuation, and liquidity at the CIT are going to be critical.
Eric Requenez: That’s really helpful background, thanks. Now let’s talk about “why.” Jessica, what’s driving asset managers into CITs in the current market?
Jessica Reece: There are three main reasons why we are seeing so much interest from managers in CITs. First, cost-efficiency. Without SEC registration, prospectuses, and some public company reporting burdens, CITs can operate at lower administrative cost, which translates into lower net expenses—a major fiduciary focus for plan sponsors. Second, flexibility and customization. CITs allow multiple share classes, tailored fee schedules, plan-specific features and unique investment guidelines without having to materially re-paper the whole vehicle. Third, distribution. CITs are native to retirement platforms, they can be unitized and priced daily, and they integrate with recordkeepers, so they give managers scalable access to a very large and growing pool of defined contribution (“DC”) assets.
Josh Lichtenstein: I would also add that compared to mutual funds, many plans prefer CITs for identical or very similar strategies because the net-of-fee results can be more favorable. CITs also offer certain institutional features—custom benchmarks, plan- or class-specific fee breakpoints, or “clean shares”—that may be harder to implement in a mutual fund than in a CIT. And CIT-based TDFs have been a major driver of market share gains and serve as an entrance point into alternatives for 401(k) plans, which we will discuss in more detail. Compared to other alternative vehicles, the CIT has the benefit of being familiar to plans, but I know the governance model may be less familiar to some of our listeners. Eric, what do you think asset managers should know about this?
Eric Requenez: This is where CITs really differ from typical products our asset managers are familiar with. A CIT’s trustee is the bank or trust company that forms the trust, administers the fund, and serves as a fiduciary. The adviser or sub-adviser manages the fund portfolio within approved investment guidelines. The trustee typically approves changes to the fund documents, valuation methodologies, NAV determinations and suspensions, and investor eligibility determinations. The adviser handles the day-to-day management, monitoring, reporting, and proposed changes to investment parameters, all subject to trustee approval.
It’s important to note that share classes in CITs are common. You might see differences in fees, liquidity terms or administrative features tailored to different plan sizes or recordkeeper requirements. It’s also common for CITs to establish separate classes for the clients of a single consultant. Furthermore, while not as common as in the private fund construct, side letters can be utilized, but they cannot override the trust instrument or violate ERISA. Instead, they typically clarify operational points or confirm existing obligations.
Josh Lichtenstein: I would also add that the trustee’s fiduciary role is critical under ERISA as well as banking law, and that’s why having a fiduciary at the CIT is one of the key features that’s appealing to plan sponsors. The bank has to avoid self-dealing and also has to be concerned with the prohibited transactions rules under ERISA in the fund’s operations, unless an exemption applies. And as we’ll get into shortly, when alternatives are involved, fiduciaries should ensure that fair valuation practices and liquidity gates are all being appropriately calibrated and disclosed, and that they align with the requirements under applicable banking laws and the requirements that plans face.
Eric Requenez: Josh, you just mentioned liquidity gates. What sort of liquidity do we typically have when it comes to CITs, Jessica?
Jessica Reece: While alternative CITs often provide daily pricing, the liquidity varies and may be daily, monthly, or quarterly. The trust documents define the redemption calendar, notice, in-kind or cash-settlement mechanics, and the circumstances for suspensions. Recordkeeper compatibility and NAV timing are front-of-house issues that also need to be aligned early in the process.
Eric Requenez: Thanks for that color. It’s also worth noting that where a CIT is a component of a broader investment option, like a target date fund, the TDF may offer more frequent liquidity to 401(k) participants than the CIT offers. So, shifting gears a bit, Josh, since we’re focusing on alternative CITs, let’s talk about President Trump’s executive order from this summer, which calls for expanded access to funds and other alternative classes for 401(k) plan investors. Why is that creating excitement and buzz for managers and raising the profile of CITs?
Josh Lichtenstein: This has really been a hot topic, and I’m going to assume that most of our audience has some awareness with the executive order, so I’m not going to just summarize it. But, I will say that the order does not substantively change the requirements of ERISA, but it marks a significant regulatory shift, because it’s signaling strong support from the federal government at the highest levels for expanding the menu in investment options available to 401(k) plan participants. The order directs the DOL to clarify fiduciary duties under ERISA, propose new rules and safe harbors, and prioritize actions to curb ERISA litigation that might otherwise constrain a plan fiduciary’s ability or willingness to offer a more diverse range of investment options to plan participants, and that can include alternative investments.
Now, the DOL has indicated in past guidance that professionally managed options, like target date funds (“TDFs”), can incorporate a measured allocation to alternatives, as long as the fiduciary process is sound—meaning there’s robust diligence; there’s adequate diversification of assets; there are good controls in place around valuation; liquidity management; and also that the participant risk level is appropriate for the plan participant base that would be investing. The exposure is typically capped and delivered through a diversified sleeve or intermediary structure which is itself selected and vetted by other fiduciaries, which is meant to allow plan participants to access these types of assets without needing to engage with what presents as a much more complex vehicle.
Jessica Reece: Josh, what I think is notable about what you’re saying is that even without further guidance from the DOL and the SEC, managers already possess the tools to successfully design and offer these products, which plan fiduciaries can select from in accordance with their duties under ERISA. We’re seeing target date CITs allocate a portion of their portfolio to private credit, real assets, or private equity sleeves, while still striking a daily NAV. The trick is designing investment and valuation policies that support daily pricing and redemptions at the CIT level. That can mean using interval funds, feeders, or liquidity sleeves as cash management tools to bridge liquidity.
Eric Requenez: So, this is how CITs become the so-called “bridge” to private markets for participants?
Jessica Reece: Exactly. Participants see a familiar target date fund on their menu. Under the hood, the CIT’s multi-asset portfolio may include a prudent allocation to less liquid exposures. The CIT maintains participant simplicity—no K‑1s, no capital calls, no lockups at the participant level—while the institutional investors capture diversification benefits.
Josh Lichtenstein: That’s exactly right. CITs are continuing to gain traction in DC plans. Like we were saying before, it is driven, in part, by cost, but also the customization and the increasing prevalence of target date funds. We’re seeing sophisticated CITs that mirror private fund features, with drawdown mechanics, adapted to the DC-operational realities without putting greater demands on plan participants than standard funds. Moreover, recordkeepers increasingly support CITs natively. Plan sponsors are comfortable with CITs that behave like mutual funds operationally, while offering institutional economics, as well as using CITs that have these institutional features as a form of alternative access. So, Jessica, like you were just saying, the complexity winds up being under the hood, and of course, it needs to be explained to participants, but it makes it an easy investment for participants to select and access.
Jessica Reece: If an asset manager is contemplating offering a CIT product, Eric, what are the first practical steps that they should be taking?
Eric Requenez: That’s a good question. I think there are several measures managers can implement:
Align on distribution strategy and platform fit;
Select a trustee with the right charter, operational capabilities and federal and state law regimes;
Map investment guidelines to daily pricing requirements; and
Design share classes responsive to their client segments.
What’s important to note is that early involvement of the trustee on valuation and liquidity policies will save time. And advisers would be well served to ensure that their compliance and reporting infrastructure is ready for plan-level scrutiny.
Josh Lichtenstein: I would also add that the manager needs to think about the fact that this is a product that is designed for ERISA plan investors, and that the fiduciary case is critical. This means that things like fees, the documentation of the diligence process, and participant communications and education are all going to be critical. And if the CIT will offer alternatives, then having an appropriate process around the alternatives, including valuation and vetting of the assets, is going to be key as well.
Eric Requenez: So, to recap our discussion: CITs combine institutional terms with DC-native operations, giving asset managers a flexible, scalable path into retirement assets. With prudent governance, strong trustee oversight, robust valuation and liquidity policies, and ERISA-aligned processes, CITs can responsibly expand access to sophisticated strategies, including measured alternatives exposure, within the DC plan ecosystem.
Jessica and Josh, thank you both for all of your insights, and thank you to all of you who joined us today.
If anyone has any questions about what we discussed today, please don’t hesitate to reach out to Jessica, Josh or me, or another member of our retail alternatives team. Also, for more information on these or other topics of interest in the asset management or ERISA areas, please visit our website at www.ropesgray.com. If you enjoyed today’s discussion, please subscribe and listen to this series on Apple or Spotify. Thank you again for listening.