Shnitser on CITs

Natalya Shnitser posted a really fascinating paper that taught me about collective investment trusts (CITs), which, I have to admit, wasn’t something I knew anything about.

As I understand it, they function very much like a mutual fund, but they’re managed by banks instead of investment companies.  As such, they are exempt from much of the securities regulation that protects mutual fund investors – very little transparency or liquidity – but they’re increasingly showing up on 401k menus, to the point where, according to Shnitser, they now represent 30% of defined contribution plan assets.

The rationale for this exemption from securities regulation is that, once upon a time, when defined benefit plans dominated the workplace, it was assumed employers/pension plans would be able to bargain on equal terms, but that’s not true today, when individual workers simply select CITs from among other investment choices.

One area I’m particularly interested in is their role in corporate governance.  Because these are retirement plan assets, CITs are ERISA fiduciaries, and that means, among other things, that they must vote their shares to benefit the plan, just like a pension fund would.  But because they don’t have to publicly report their votes, there’s no real mechanism of enforcement.  That said, the big mutual fund companies – BlackRock, Vanguard, Fidelity, State Street – have apparently gotten into this space, figuring, if banks are going to be able to offer CITs that compete with mutual funds but with fewer regulatory burdens, mainstream asset managers may as well claim a piece of that business, too.  Which would suggest that CIT shares are being voted the same way fund families vote – BlackRock, I assume, doesn’t have a separate voting policy for CITs versus index funds.  But since the big mutual fund companies are now experimenting with versions of pass through voting, will that mean CIT investors are left out in the cold?

Anyway, here’s the abstract:

The retirement security of millions of American workers is increasingly tied to an investment vehicle that most have never even heard of, and whose dramatic rise has received almost no regulatory scrutiny in recent decades. With nearly $7 trillion dollars in assets, “collective investment trusts” (CITs) are rapidly replacing mutual funds on the investment menus of employer-sponsored retirement plans. Individuals who once had staked their retirement nest eggs on the returns from mutual funds have had more and more of their savings transferred into bank sponsored CITs, which now hold nearly 30% of all assets in defined contribution plans, up from just 13% a decade ago. Yet despite such dramatic growth and economic significance, CITs which look and act a lot like mutual funds but are sponsored by banks and subject to oversight by the Comptroller of the Currency—have been largely overlooked, with almost no critical analysis of CITs as investment funds, as institutional investors, and as increasingly important participants in an interconnected financial system.

This Article tells the story of a century-old bank product seizing on regulatory gaps and exploding in popularity among retirement plans seeking cheaper investment options for individual participants. The dramatic growth of CITs raises new and critical questions about the tradeoffs associated with CITs: in particular, the benefits of lower fees versus the individual and systemic risks that may stem from lower transparency, fragmented regulatory oversight, fewer restrictions on permitted investments, and centralized control in the hands of bank trustees. In identifying these tradeoffs, this Article builds the foundation for future scholarship to improve the understanding of the behemoth investment vehicle whose growth and impact have gone largely unexamined over the last four decades.