Collective Investment Trusts: Regulated, Lower Cost, and Beneficial for Retirement Plan Investors
Introduction
Recent commentary on collective investment trusts (“CITs”) generally focuses on what CITs are not: they are not mutual funds, they are not registered with the Securities and Exchange Commission (“SEC”), and they are not subject to the same SEC-regulated retail disclosure framework that applies to registered investment companies. This framing misses the central point: CITs are investment vehicles offered to institutional investors, not retail products offered to individual investors on securities exchanges. In the retirement plan context, CITs are evaluated, selected, and monitored by plan fiduciaries under the Employee Retirement Income Security Act of 1974 (“ERISA”), who must act prudently and solely in the interests of plan participants and beneficiaries. In ERISA-governed defined contribution 401(k) plans, CITs are available only through the plan investment lineup as a designated investment alternative selected by plan fiduciaries and are not available to participants who utilize a self-directed brokerage window. And for CITs offered to ERISA-governed retirement plans, the CIT managers are also ERISA fiduciaries subject to the same duties of prudence and loyalty as the plans’ fiduciaries.
Because CITs are available only to institutional investors, they offer significant cost savings and expanded investment choice to retirement plan investors. The market has already recognized these advantages. CITs, which must be maintained by banks or trust companies for tax-qualified retirement plans, now account for more than 40% of all defined contribution (“DC”) plan assets, including 54% of target-date fund assets and nearly 60% of the assets in DC plans exceeding $1 billion. The popularity and continued growth of CITs in retirement plans reflect a straightforward proposition: lower costs and ERISA fiduciary oversight can provide meaningful participant benefits without importing the entire retail mutual fund regulatory model.
Participant Cost Savings
The core case for CITs begins with cost. Because CITs are offered only to qualified institutional retirement plans—retail investors, including individual retirement account (“IRA”) holders, are prohibited from investing in CITs—they avoid many of the costs built into the mutual fund structure, including SEC registration, retail marketing, and distribution costs.1 Plans can also negotiate a CIT’s fees directly with the CIT trustee, which provides additional leverage to larger plans. In addition, Office of the Comptroller of the Currency (“OCC”) and ERISA regulations governing CITs prohibit the charging of certain expenses to the fund.2
CITs also offer cost savings to retirement plan investors through their account structure. While mutual funds require a transfer agent to track individual investor accounts daily, CITs use an omnibus account structure where the trustee handles the bulk assets. This enables 401(k) plan recordkeepers to handle individual participant processing without incurring redundant fees. CITs nonetheless generally provide daily valuation and standardized processing through the same systems used by mutual funds (typically the National Securities Clearing Corporation).
These aggregate cost savings are meaningful. For example, according to Morningstar’s 2025 Retirement Plan Landscape Report, the average asset-weighted expense ratio of an actively managed mutual fund is 60.1 bps, while the average asset-weighted expense ratio of an actively managed CIT is only 23.9 bps (more than 60 percent cheaper). Passively managed CITs are similarly less costly than their mutual fund counterparts (3.1 bps versus 7.4 bps)—more than 58 percent cheaper. Given that many investment firms offer their mutual fund investment strategies as CITs, the lower CIT fees directly result in plan participants having more money in retirement. As the U.S. Department of Labor (“DOL”) has explained, a one-percentage-point (100 bps) difference in fees over time can result in a 28 percent difference in a participant’s account balance at retirement.
ERISA Supplies the Guardrails
The substantial cost savings that CITs offer do not come at the expense of oversight. Unlike mutual fund managers, CIT trustees and sub-advisors are fiduciaries who must comply with ERISA’s duties of prudence and loyalty and its prohibited transaction provisions. The CIT trustee has fiduciary responsibility for the CIT’s assets, which includes investment management, monitoring any sub-advisors, overseeing regulatory compliance, and ensuring that the CIT operates in the best interest of plan participants. And while a CIT trustee may delegate certain investment management responsibilities to sub-advisors, that delegation must be accompanied by due diligence, monitoring, and termination rights consistent with ERISA’s co-fiduciary and delegation principles.
CIT trustees also cannot engage in conflicted conduct unless they expressly satisfy the conditions of an ERISA prohibited transaction exemption. For example, CITs are prohibited from engaging in cross-trades, and should a CIT wish to invest in an affiliated investment product, the trustee must comply with the terms and conditions of an ERISA exemption or eliminate all conflicts of interest pursuant to long-standing DOL guidance.3 CITs, like other ERISA-regulated vehicles, also cannot violate any of ERISA’s or the Internal Revenue Code’s (“Code”) other prohibited transaction rules, which effectively prohibit all financial transactions between CITs and parties in interest to plans (e.g., other service providers to the plan) without satisfying the terms and conditions of an applicable ERISA prohibited transaction exemption.4 ERISA fiduciaries of CITs are further prohibited from entering into transactions with the investing fiduciaries (including their affiliates) of any “significant investor” in the CIT, which requires additional oversight and the build-out of a sophisticated compliance infrastructure. Mutual fund managers are not subject to these requirements, as federal securities laws generally permit them to address any conflicts of interest through disclosure, rather than mitigation or elimination.
Further, ERISA provides for significant penalties if any of the prohibited transaction rules are violated. The inadvertent failure to comply with a single condition of a prohibited transaction exemption can lead to significant penalties as well as reputational risk. In addition to reversing any transactions that are prohibited, ERISA fiduciaries may be required to pay excise taxes to the IRS and can be held personally liable for fiduciary breaches. The DOL and IRS can also impose additional penalties and enforcement mechanisms.
Disclosure Is Targeted to the Retirement-Plan Context
Although CITs have been around for many decades (and longer than mutual funds), and have seen substantial growth in recent years, they have recently been targeted by critics of the current administration who are concerned about private market asset classes being made available to more DC plan investors. These critics argue that CITs are less transparent—and therefore riskier to plan participants—because they are not subject to the same disclosure requirements as mutual funds. This argument misses the mark. While many critics focus on the requirement for mutual funds to provide an updated prospectus annually—and CITs do not—this argument fails to consider that mutual funds are retail products that can be bought or sold by retail investors. Retail availability is the fundamental basis for the prospectus and other SEC-imposed disclosure obligations.
CITs, on the other hand, are selected and monitored by ERISA plan fiduciaries who have a legal obligation to always act prudently and in their participants’ best interests.5 Those plan fiduciaries have ample information readily available to them about the CITs offered in their plans. For example, CITs are governed by a Declaration of Trust, a Participation Agreement, and an Investment Policy Statement. In addition, CIT offering materials typically include fee breakdowns, investment objectives, risk factors, and ERISA and tax considerations. CITs also often provide fiduciaries and participants with “fact sheets” that describe in plain terms—similar to a prospectus—the CIT’s investment strategy, historical performance, sector exposure, top holdings, and asset allocation. Participants also know the costs associated with investing in a CIT, as those are reported in their plan’s annual participant fee disclosure and are available on demand when they access their plan account through their plan’s recordkeeper portal.
CITs are also subject to strict annual reporting requirements on the DOL’s Form 5500. Many CITs file their own Form 5500 as a Direct Filing Entity (“DFE”), providing centralized data on the participating plans, the dollar value of each plan’s pro rata interest in the CIT, and the categorization of all underlying assets of the trust. For those CITs that do not file a Form 5500 as a DFE, plans participating in those CITs report on their own Forms 5500 information about the CIT and the plan’s interest in the CIT.6
Some recent criticisms of CITs have also focused on proxy voting because CITs are not required to file mutual fund-style public proxy voting reports. While proxy voting reports may provide some voting transparency, ERISA imposes enforceable duties with respect to CIT proxy voting. As the DOL recently reiterated in Technical Release 2026-01, “voting rights and other shareholder rights attributable to shares held by ERISA-governed employee benefit plans are plan assets” subject to “ERISA’s fiduciary duties, including the duties of prudence and loyalty.” As a result, a CIT trustee engaging in proxy voting for ERISA plan assets must act solely in the interests of the participants and their beneficiaries when doing so (or face personal liability for breaching their fiduciary duties).
Overlapping Legal Protections Governing CITs
Section 3(c)(11) of the Investment Company Act of 1940 imposes structural limits on CITs. To maintain its exclusion from being considered an investment company under the federal securities laws, a CIT must be maintained by a bank, and the trustee must exercise substantial investment responsibility rather than merely serving as custodian or rubber-stamping investment decisions should it delegate responsibilities to a sub-advisor. As noted above, any delegation must be accompanied by due diligence, monitoring, and termination rights consistent with ERISA’s co-fiduciary and delegation principles.7
Some recent commentators have faulted CITs because they are not regulated by the SEC. But this does not mean they are not regulated. To the contrary, CITs are governed by a layered framework that includes regulations promulgated by the OCC, state banking or trust law, and Code group-trust rules. For national banks and federal savings associations, CITs are subject to the National Bank Act and the rules and regulations of the OCC. State banks and trust companies are subject to their applicable state banking laws as well as common law fiduciary duties (in addition to the ERISA requirements described above).
Similar to the SEC’s requirements for mutual funds, OCC rules require CITs to have a written plan, periodic valuation, independent audits, annual financial reports, reasonable fees, risk-management processes, and restrictions on conflicts and self-dealing. These requirements ensure that retirement plans participating in a CIT (and their participants) receive fair value for their interests and that redemption requests are processed in an orderly and equitable manner, protecting against the risk of preferential treatment among plans.8 OCC rules also regulate CIT fees and expenses and prohibit a CIT from charging organizational expenses. And while CITs sponsored by state-chartered banks and trust companies are not directly subject to OCC rules and regulations, many states incorporate or apply the OCC’s rules and regulations by statute, rule, or other guidance in examining collective trust activities.9 ERISA’s fiduciary standards further restrict the ability of CIT trustees to pass through expenses such as marketing and other offering expenses that do not directly benefit plan participants. This is in contrast to mutual funds, where the fund’s board of directors has broader discretion to allocate organizational, distribution, and other expenses to the fund and its shareholders.
CITs also provide tax and structuring advantages. Among other requirements, IRS revenue rulings require CITs to hold assets exclusively for the benefit of plan participants and be maintained by a regulated bank or trust company fiduciary in order to preserve tax efficiency for qualified retirement-plan assets without the distribution mechanics applicable to regulated investment companies.10
The layered framework described above provides meaningful governance and oversight of CITs. OCC and state trust law establish the legal and operational standards; ERISA addresses participant protection, fiduciary process, and prohibited transactions. This framework has operated as designed for decades as assets invested in CITs have continued to grow, and it provides plan fiduciaries with a lower-cost vehicle for institutional retirement investing.
CIT Structures Can Expand Investment Choice Without Removing Protections
CITs are particularly useful in professionally managed structures including target-date funds, asset allocation funds, and managed accounts. Because CITs provide more flexibility than mutual funds, they can be designed to include asset allocations to annuities to provide lifetime income or across public and private markets such as real estate, private equity, and private credit, each supported by trustees, sub-advisors, valuation agents, or other specialists.11
This structural flexibility should not be mistaken for an absence of standards or protections for retirement plans or their participants. To the extent CITs offered to 401(k) plans include exposure to private markets or alternative investments, it is through diversified, professionally managed vehicles such as target-date funds or managed accounts.12 Moreover, the CIT trustee is bound by ERISA’s fiduciary duties of prudence and loyalty when selecting, valuing, and monitoring the CIT’s strategy. Properly structured, CITs can give participants access to diversified strategies historically available only to defined benefit plans and wealthy investors, while preserving daily valuation, liquidity management, fee-sensitivity, and fiduciary oversight.
Conclusion
CITs do not need to look or be structured exactly like mutual funds to be appropriate retirement-plan investments. As explained above, CITs are lower-cost, institutionally negotiated investment vehicles selected by ERISA fiduciaries, managed by bank trustees, subject to OCC and state trust-law oversight, supported by Form 5500 and ERISA disclosure rules, and constrained by ERISA’s fiduciary duties of prudence and loyalty. While recent commentators suggest that plan fiduciaries have a binary choice between offering CITs and mutual funds in their plans, this ignores the fact that CITs and mutual funds are both appropriate DC plan investments. The better and more appropriate question is whether plan fiduciaries can prudently offer CITs in their plans to lower costs, improve diversification, and expand investment choice for participants while complying with their fiduciary duties under ERISA. In many cases, the answer is “yes.”
1 Sections 5 and 8 of the Securities Act of 1933; Sections 30–31 of the Investment Company Act; 17 C.F.R. § 270.12b-1.
2 12 C.F.R. § 9.18(b); ERISA § 408(b)(2).
3 See, e.g., Prohibited Transaction Exemption 77-4, as amended; Advisory Op. 2005-10A (the “Country Trust” opinion). Among other requirements, Prohibited Transaction Exemption 77-4 prohibits the charging of double fees, commissions, or redemption fees and requires disclosure and consent. The Country Trust opinion requires the fiduciary to fully offset any additional fee or compensation that is paid to itself or one of its affiliates.
4 Trustees and sub-advisors of CITs typically comply with Prohibited Transaction Exemptions 84-14 (the “QPAM Exemption”) or 91-38 (the “Collective Investment Trust” Exemption).
5 The US Supreme Court emphasized in Tibble v. Edison Int’l, 575 U.S. 523 (2015), that ERISA plan fiduciaries have a continuing duty to exercise prudence when selecting and monitoring plan investments offered to their plan participants.
6 Plans must also report on their Forms 5500 any prohibited transactions as well as any compensation received by any plan service provider.
7 See SEC Settlement with Great Plains Trust Company, Inc. (September 30, 2020).
9 Specifically, many state regulators and legislatures adopt or mirror 12 C.F.R. § 9.18, which is the primary OCC regulation governing collective investment trusts.
10 Rev. Rul. 81-100, 1981-1 C.B. 326, as modified by Rev. Rul. 2004-67 and Rev. Rul. 2011-1; I.R.C. § 501(a).
11 Section 3(a)(1)(A) of the Investment Company Act of 1940 defines “investment company” to mean an “issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities” (emphasis added). CITs are not so limited.
12 401(k) plan participants cannot directly purchase interests in stand-alone private funds that rely on all of their investors to be qualified purchasers or accredited investors. See, e.g., PanAgora Group Trust No-Action Letter (April 29, 1994); Standish Ayer & Wood Inc. Stable Value Group Trust (December 28, 1995); H.E. Butt Grocery Company (May 18, 2001).
