Plan Sponsors looking for lower-cost investment vehicles

15 Independence Boulevard ♦ Warren, New Jersey 07059 ♦ Phone: (973) 538-4347 ♦ Facsimile: (973) 538-0935
www.porteval.com
June 2016
IS CHEAPER ALWAYS BETTER?
The Evolution of Collective Investment Trusts and Considerations for Plan Sponsors
Ashley diMayorca, Senior Consultant, and Kathryn Spica, CFA, Senior Research Analyst
PLAN SPONSORS have increasingly focused on finding
low-cost investments and more transparent fee structures
for their retirement plans, in part due to the increasing
number of headlines related to fee-based litigation
issues. While on occasion this leads plan sponsors to
consider passive investment products, such as index
funds, for their plan lineup, it can also induce
conversations related to investment vehicle choice, such
as considering using collective investment trusts (CITs)
over traditional open-end mutual funds. This paper
provides an overview of and trends surrounding CITs, in
particular within the target date industry, and outlines
what plan sponsors should consider when looking at
adding CITs to their plan lineup.
Executive Summary
 Availability of collective investment trusts (CITs)
is increasing as plan sponsors look for low-cost
vehicles, as well as more transparent cost
structures, to offer participants.
 While typically lower in costs, CITs also have
other characteristics—such as different regulatory
oversight and data availability—that cause them
to differ from mutual funds.
 Target date fund (TDF) providers take different
approaches to offering CITs along with mutual
funds, with some providers offering similar
products regardless of vehicle, while other
providers offer CITs that vary significantly from
their mutual fund counterparts.
 When evaluating, selecting, and monitoring a CIT,
especially as a target date vehicle, it is important
to follow and document a prudent process.
 PEI, with our comprehensive proprietary database
of TDF providers, is able to help our clients
identify lower cost TDF vehicles to offer
participants and evaluate the suitability of these
vehicles for their plan participants.

Portfolio Evaluations, Inc. | www.porteval.com Is Cheaper Always Better? | 2
OVERVIEW OF CITS
A CIT, also known as a commingled or collective fund, is a pooled investment vehicle used by defined benefit and defined
contribution plans. Similarly to open-end mutual funds, CITs can be indexed or actively managed and can be invested in a
broad array of asset classes. Unlike open-end mutual funds, which are regulated by the Securities and Exchange
Commission (SEC) and must regularly report their full portfolio holdings and monthly performance, CITs are issued by
banks or trust companies and are therefore overseen by the Office of the Comptroller of the Currency (OCC) (state-
chartered banks that issue CITs are subject to their specific state’s regulations) and have very few requirements in terms of
reporting and disclosure, thereby lessening their overhead costs.
Table 1: Features of CITs versus Mutual Funds
CHARACTERISTICS COLLECTIVE INVESTMENT TRUST MUTUAL FUND
Open to Individual
Investors
No Yes
Open to Most
Retirement Plans
Yes Yes
Open to 403(b) Plans No Yes
Regulator OCC or state banking regulator SEC
Required Reporting Declaration of Trust
Prospectus, proxies, statements of
additional information
ERISA Disclosure
Requirements
Same ERISA disclosure requirements (i.e. returns and
expenses) for mutual funds and CITs
Same ERISA disclosure requirements (i.e.
returns and expenses) for mutual funds
and CITS
Form 5500 Filing
CITs used in defined contribution plans must provide
fee disclosures to assist plan sponsors in completing
Form 5500. The fee disclosure can be sent to the record-
keeper or directly to the plan sponsor
Mutual funds provide the same kind of fee
disclosures as CITs, but typically provide
it to the record-keeper
Plan Level Portability
Some CITs have anti-dilution clauses in which plans pay
the transition costs for large, sponsor-initiated cash
flows into and out of the CIT
No issues
Participant Level
Portability
CITS are not available to individual investors, so when
participant leaves the plan (i.e., rollovers), the CIT
option is no longer available
No issues in most cases
Share Classes Different share classes possible Different share classes possible
Investment Expenses Typically less expensive Typically more expensive
Participant
Considerations
No ticker
Fact sheets similar to mutual funds
Most are priced daily
Ticker symbol
Fact sheets
Daily pricing
Fee Structure
Most CITs are offered in net of fee structure; some
charge operating and/or management fees to the plan
Net of fee

GROWTH IN CITS
CITs have been gaining prominence. According to Pensions & Investments1
, assets invested in CITs have grown from
$895.6 billion in 2008 to $1.51 trillion in assets at year-end 2014. CIT vehicles in the TDF space are also gaining in
prominence. An important trigger for that growth was the Pension Protection Act of 2006, which stated that CITs were
eligible to be used as a Qualified Default Investment Alternative (QDIA) within defined contribution plans. In addition, as
plan sponsors are increasingly fee conscious, the option to elect a low-cost CIT as a default for participants holds appeal.
For example, T. Rowe Price, a firm which offers target date funds in both CIT and mutual fund vehicles, reports that in the
past 12 months, roughly $4.1 billion in assets have shifted from its flagship mutual fund series to its two CIT series.
EVOLUTION OF CITS
As CITs have grown in assets, there have also been strides in improving the plan sponsor and participant experience in
using these vehicles. Historically, plan sponsors have been hesitant to offer CITs in their defined contribution line up for
several reasons, including the following:
 Lack of SEC oversight
 Form 5500 filings were more difficult
 Concerns for a participant experience
 CITs did not have a revenue sharing component
However, several key shifts in the retirement plan landscape have helped CITs become increasingly retirement plan
friendly, both for the plan sponsor and the participant.
While CITs, as they are not regulated by the SEC, are not required to distribute prospectuses or statements of additional
information, CIT assets in a qualified plan are considered to be plan assets, and are therefore subject to ERISA disclosure
requirements. These disclosure requirements are the same for mutual funds and CITs. Both CITs and mutual funds, for
example, are required by ERISA to disclose performance, benchmark performance and expense information.
ERISA also requires plan sponsors to annually fill out Form 5500, which includes disclosures related to the financial status
of the plan. Both CITs and open-end mutual funds used by defined contribution plans are subject to DOL and ERISA
reporting requirements and must provide fee disclosures to the plan’s record-keepers (CITs may provide this information
directly to plan sponsors).
1
http://www.pionline.com/article/20160222/PRINT/302229985/use-of-cits-in-dc-plans-booming-rises-68-since-2008.

Oversight by the OCC, rather than the SEC, has allowed CITs to achieve significant cost savings relative to mutual funds,
however, until recently it also meant less transparency from the participant perspective. For one, because CITs are not
traded on an exchange, CITs do not have to be priced daily. Several years ago, CITs were commonly priced monthly;
today, to address the needs of plan sponsors and participants, most CITs have daily pricing, just like open-end mutual
funds. In addition, some plan sponsors have cited concerns that since CITs do not have ticker symbols, participants would
not be able to find information on these investments from public sources. While that remains true, the industry has made
strides to make investment information more easily accessible. As the popularity of CITs grows, so does the record-
keepers’ ability to provide communications and education materials for CITs in the same format and detail as they provide
for mutual funds. For example, providers are able to create fact sheets, which are very similar to those created for mutual
funds, and deliver these to plan record-keepers, creating a seamless experience for participants to find information on both
mutual funds and CITs from the plan website.
Historically, CITs were almost always offered without a revenue sharing component. The lack of ability to offset
recordkeeping expenses made CITs less desirable for defined contribution plans, who had to pay these costs out-of-pocket
or charge an additional expense to participants, and record-keepers, who were typically paid from the revenue sharing
component of investments. Today, CIT providers often are able to offer tiered pricing, incorporating a revenue sharing
amount that can more closely align with plan sponsors’ needs. In addition, in line with the growing trend to make
participant expenses—investment and administrative—more transparent and level across investments, more plan
sponsors are looking for investment vehicles without revenue sharing. While mutual funds are also increasingly offering
“zero revenue sharing” share classes, the simplicity and flexibility of CITs’ pricing, along with their often lower overall
expenses, is driving their more recent increase in popularity.
Still, there are some unique differences between CITs and mutual funds that plan sponsors should be aware of. For example,
CIT providers may have anti-dilution policies. An anti-dilution provision is a feature a provider may institute that will
require a plan sponsor to pay the costs of moving assets in or out of the CIT if that asset size reaches a specific threshold.
For example, some providers may charge transaction costs if plan assets are above a specific percentage of total CIT assets.
Typically, this feature is only a concern if a plan sponsor is investing in a recently launched CIT or one without a significant
asset size. In addition, since CITs are only available to institutional investors such as defined contribution plans,
participants leaving a 401(k), for example, would not be able to rollover their assets to an identical vehicle outside of the
plan. From a fee perspective, CITs can vary by how they charge operating and management expenses, which are included
in the all-encompassing trustee fee. Some CITs deduct these expenses from CIT assets, while others do not deduct these
expenses and instead each plan sponsor pays the bank or trustee company a set fee.

CITS FROM AN INVESTMENT PERSPECTIVE
Investment managers also differ in their approach to managing CIT and mutual fund assets, and plan sponsors should be
aware of any differences in strategy across vehicle. For single asset class strategies, an investment firm will typically offer
a CIT and a mutual fund version of the same investment strategy. In these cases, the CIT is typically managed by the same
portfolio management team as its mutual fund counterpart and holds the same securities (stocks and bonds) as the mutual
fund and in the same proportion. The performance and volatility for the mutual fund and CIT can therefore be expected to
be very similar. However, for target date products, firms have taken several different approaches to launching CIT and
mutual fund vehicles. While some investment firms offer an identical strategy in both a CIT and mutual fund vehicle, other
firms have opted to launch CIT and mutual fund products with different goals or different methods of implementation,
causing there to be significant deviations in participant outcomes. When searching across vehicles for a target date product,
plan sponsors should be cognizant of the variability across providers.
OVERVIEW OF CITS WITHIN THE TARGET DATE FUND INDUSTRY
PEI’s comprehensive database, which includes data from extensive due diligence on more than 30 of the largest target date
fund (TDF) providers, has allowed us to conduct a thorough analysis of the vehicle offerings by provider. For the vast
majority of providers, mutual funds appear to be the vehicle of preference for most TDF providers, with all but four
providers offering a mutual fund TDF vehicle. In fact, one-third of the TDF providers in the PEI database offer mutual
funds only. All of these mutual fund TDF providers offer a variety of share classes, including traditionally lower cost
institutional shares without 12b-1 fees or other revenue credits. While CITs appear to be the flagship for a handful of
providers, providers with flagship TDF mutual funds continue to launch TDF CITs. Indeed, four TDF providers with
mutual fund strategies launched TDF CITs in the past two years.
While TDF providers with actively managed underlying strategies are less likely to offer their product in a CIT vehicle, all
of the providers in PEI’s TDF database that have a purely indexed implementation (all underlying strategies in the TDF
are indexed) offer their product in a CIT vehicle, and some offer both mutual and CIT versions. CITs are more common
for indexed products, as they align with the fee-conscious objective of many indexed fund investors. In fact, indexed TDF
CITs have some unique characteristics. Often, these CITs come in lending and non-lending share classes, meaning
providers can loan out underlying securities to try to keep overall net expenses down. Indexed TDF CITs tend to mirror
the mutual fund TDFs more so than active or hybrid strategies, although there are some exceptions.

Of the TDF providers with active mutual fund strategies that also offer active TDF solutions in CITs, there are only a few
whose CIT version closely resembles the mutual fund. In this case, PEI considered the products’ glide paths, underlying
strategies and portfolio managers, and sub-asset class exposures when determining similarity. American Century, for
example, launched its active TDF mutual fund series in 2004. In 2014, the firm launched a CIT version of the series, which
closely mirrors the mutual fund series. The firm cited the flexibility in pricing within a CIT vehicle as one of the key
benefits of offering a CIT version of the TDFs.
Hybrid TDF CITs, those that combine both active and passive underlying strategies, are the most common structure, with
12 providers offering hybrid CITs. Some active mutual fund TDF providers offer a CIT version of their product in a hybrid
strategy, opting to replace select actively managed underlying funds with passive strategies to lower both costs and active
risk, thus appealing to a more institutionally minded client base. For example, Fidelity offers an active TDF mutual fund
series and a hybrid TDF CIT series (the firm also has a passive TDF in both a mutual fund and CIT vehicle). Outside of
TDFs, Fidelity also offers CITs for several single asset class strategies, and had historically managed these assets distinctly
from corresponding single asset class mutual funds. Over time, the strategies in several of the mutual funds have become
more closely aligned to CIT counterparts, and today there are rarely differences between the CIT and mutual fund version
of the firm’s strategies.
Across mutual fund TDF providers, expenses are typically dependent on the age vintage. The 2020 fund, for example, has
a different (often lower) expense ratio than the 2060 fund, as it often invests in typically less expensive fixed-income
securities. For TDF CITs, however, the expense ratio is usually the same across age vintages. This feature may appeal to
plan sponsors who are conscious of leveling fees across their participant base. Like many CIT providers, American Century
charges a single fee across all vintages of the TDF CITs (49 basis points), which offers a simpler pricing model for plan
sponsors attracted to that pricing method. In contrast, the expenses of the mutual fund version varies across vintages, as
expenses are rolled-up from the underlying mutual funds. For example, for the zero-revenue sharing R6 mutual fund share
class, expenses range from 50 basis points for the Retirement Income fund to 69 basis points for the 2060 fund, reflecting
the greater expense of equity strategies used more predominately in the longer-dated funds.
The growth in TDFs as a primary vehicle for retirement plan participants has led to intense competition among providers
to amass TDF assets. In addition, the heightened focus among plan sponsors on expenses borne by participants has made
cost an increasingly important tool in the race for TDF providers to attract plan sponsors to their offerings. As such,
providers offering TDF CITs have made concerted efforts to appeal to a broader client base, including by lowering
minimum asset requirements for CITs, or waiving minimums altogether. There are some TDF CIT providers that do not
quote asset minimums, but instead use “relationship pricing,” which takes into account total plan assets, cash flows, and
QDIA status of the investment strategy. Most providers of TDF CITs also have multiple “share classes,” each with a

different asset minimum and expense ratio, with expenses decreasing with higher level of assets. Some providers also
provide share classes with unique revenue sharing arrangements. Overall, CIT providers are generally mindful of providing
plan sponsors with plenty of flexibility when it comes to pricing.
The following table depicts the mutual fund and CIT offerings of the three largest TDF providers:
Table 2: Overview of Largest TDF Providers' CITs and Mutual Funds Expenses
TDF
PROVIDER
UNDERLYING
IMPLEMENTATION
MUTUAL
FUND OR
CIT
EXPENSE OF MUTUAL FUND
(LOWEST PRICED SHARE CLASS)
EXPENSE OF CIT
Fidelity Active
Mutual
Fund
43-64 bps n/a
Hybrid CIT n/a
Based on assets, up to 40
bps for each vintage
Index Both 16 bps
Vanguard Index Both
10 bps for record-kept clients and
those with more than $100 million in
TDF assets; otherwise, 14-16 bps
Based on assets and
relationship, up to 8 bps
for each vintage
T. Rowe
Price
Active – higher equity glide
path
Both 49-65 bps
Active – lower equity glide
path
Both 49-65 bps
Hybrid –higher equity glide
path
CIT n/a
CONCLUSION
The rise of CITs and their broader availability means that plan sponsors should be evaluating these vehicles as part of their
due diligence process when selecting investments for their plan lineup. Given the unique features of CITs compared with
mutual funds and the different approaches providers take when constructing their products, evaluating these products may
take an extra level of due diligence.
For plan sponsors, it is important to evaluate each facet of a CIT or mutual fund TDF, from its glide path, to underlying
investments, to expenses, when selecting a product for their participants. In particular, while the net cost of a CIT compared
to a mutual fund is often lower, a lower expense ratio on a CIT may not be worth it if that cost savings is overshadowed
by higher recordkeeping or operational costs. The table on the following page reviews what plan sponsors should consider
when they evaluate using CITs as the investment vehicle for their TDF offering.

Contact and Connect
Every effort has been made to provide accurate and authoritative information in regard to the subject matter in this report; however,
accuracy and completeness cannot be guaranteed and is not warranted as such. Many statements and sources were used in compiling
the data for this report. PEI does not assume responsibility for the accuracy or completeness of such information. In addition, certain
information contained in this report may be obtained from multiple sources. PEI does not warrant that such information is accurate,
correct, complete or timely. This information is provided with the understanding that PEI is not engaged in rendering legal, accounting,
or actuarial advice. If such advice is required, the services of a competent professional of this kind should be sought. The information
contained in this alert does not constitute the recommendation of any investment advisor or their services nor does PEI assume
responsibility for the conduct of any investment manager, including the investment performance or compliance with the laws and
regulations to which they are subject. This report has been prepared exclusively, and confidentially, for the informational use of the
recipient, and any other use, including the reproduction of this report in any form, is strictly prohibited without the prior express written
permission of Portfolio Evaluations, Inc.
Table 3: What Plan Fiduciaries Should Consider When Reviewing a CIT for their TDF Solution
Assets /
Number of Plans in the CIT
 Anti-dilution expenses might be triggered if the CIT has a low level of
assets
 A higher level of assets and number of clients reduces the potential impact
of plan level cash flows
Is the TDF Strategy the Same in
the Mutual Fund as it is for the
CIT?
 Glide path (exposure to growth-seeking assets over time)
 Active/passive/hybrid implementation
 Asset class diversification
 Underlying strategies/investment teams
Cost Analysis /
Fee Structure
 Investment cost savings
 Net impact of administrative costs – will total cost to participants decrease
when revenue sharing is taken into account?
 Are there additional costs for participant communications (fact sheets)?
 Are there operational expenses for CITs that may be charged back to the
plan sponsor?
Track Record  Is there a meaningful track record to evaluate for the CIT?
 Is the CIT similar enough to a mutual fund version to use the mutual fund
track record as a proxy?
Participant Education /
Communication
 CITs do not have tickers
 Fact sheets may need to be created
 How would the information available on the participant website differ for
CIT versus mutual fund options
Form 5500 Filing Assistance  Determine how the CIT can assist in 5500 filings
Oversight  Trustees of CITs should be experienced within the industry

ABOUT THE AUTHORS
Ashley diMayorca
Senior Consultant
adimayorca@porteval.com
Ashley diMayorca is a Senior Consultant who works with her
retirement plan and endowment & foundation clients, seeking
to properly identify, develop, and implement a customized
action plan to meet their needs. Ashley offers her clients in-
depth analysis to effectively guide their investment decisions
and implementations for their retirement plans/investment
portfolios.
Ashley has over ten years of experience in the investment and
investment consulting industries. She has extensive
experience in conducting investment manager searches, asset
allocation studies and performance reports for both defined
benefit and defined contribution clients.
Prior to joining PEI, Ashley was the Director of Manager
Searches and a Consultant at R.V. Kuhns and Associates in
Portland, Oregon and was a Senior Consultant at KPMG Peat
Marwick in New York.
Ashley earned her BA from the University of Oregon and has
completed Level I of the CFA program.
Kathryn Spica, CFA
Senior Research Analyst
kspica@porteval.com
Kathryn has extensive expertise in monitoring and evaluating
investment managers and making recommendations to
effectively guide client investment decisions. She serves as
an expert on target date funds and domestic equity strategies,
offering clients in-depth analysis to assist in their retirement
plan assessment process.
Kathryn has over 8 years of investment experience. Prior to
joining PEI in 2015, Kathryn was a Senior Analyst at
Morningstar, where she researched, analyzed, and wrote
numerous reports on single- and multi-asset investment
strategies, with a particular focus on fund-of-funds, such as
target date and allocation funds. Her previous experience
includes analyzing variable annuity products, serving as a
project manager, and spending two years as a consultant in
Australia.
Kathryn holds a bachelor’s degree in psychology from the
University of Michigan and a master’s degree in business
administration from the University of Chicago Booth School
of Business. She also holds the Chartered Financial Analyst®
designation.
Contact: Portfolio Evaluations, Inc. | Daniel J. Brennan | Director Business Development
15 Independence Boulevard ♦ Warren, New Jersey 07059 ♦ Phone: (973) 538-4347 ♦ Email: dbrennan@porteval.com
Portfolio Evaluations, Inc. is a privately-owned consulting firm focused on providing institutional investment
and retirement plan consulting services. Founded in 1992, PEI operates in an independent, non-affiliated capacity
to provide advice, guidance, direction, and education to the fiduciaries of institutional investment programs.

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