YOUR ANNUITY PLAN
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Mutual Fund | CIT Comparison Chart
|Investment Options||Wide range of investment choices||Wide range of investment choices|
|Sponsor||Offered directly or through financial intermediaries|
(insurance companies, banks, broker-dealers, etc.) to public (retail), as well as institutions
including, but not limited to, qualified retirement plans.
|Offered by bank or trust companies to qualified retirement plans.|
|Eligible Investors||No limitations, subject to prospectus criteria and requirements.||Eligible trusts: tax-qualified retirement plans under the Internal Revenue Code, eligible government plans, other group trusts or insurance company separate accounts
consisting solely of tax-qualified retirement plans and/or eligible government plans.
|Investment Management Governance||Managed by investment managers approved by the mutual fund’s board of directors, subject to the|
board of directors’ supervision and oversight.
|Managed by investment managers retained by the CIT’s trustee, subject to such trustee’s supervision and oversight.|
|Regulatory Oversight||Mutual funds are subject to securities laws and regulations, including registration with the SEC.||CITs are subject to ERISA, including ERISA’s fiduciary standards and underlying DOL regulations, and state or
federal banking regulations.
|Regulatory Documents||A mutual fund is governed by its prospectus and Statement of Additional Information (SAI), which are updated and filed with the SEC on a regular basis.||A CIT is governed by its Declaration of Trust and Investment Policy Statement or similar trust documentation. There is no obligation to file these documents with a banking regulator on a regular basis.|
|Holdings Information||Performance and holdings information publicly available and filed with the SEC.||Performance and holdings information available to plan sponsors and through website postings.|
ELECTRICAL WORKERS LOCAL NO. 26 INDIVIDUAL ACCOUNT PLAN
PARTICIPANT EDUCATION: MUTUAL FUNDS & COLLECTIVE INVESTMENT TRUSTS
A Collective Investment Trust (CIT) may be an attractive, often less expensive alternative to a mutual fund, and late last year, the Trustees decided to take advantage of this cost savings by replacing Fidelity Contrafund K Shares (Mutual Fund) with Fidelity Contrafund Commingled Pool Class 1 Units (CIT). This article outlines similarities and differences between mutual funds and CITs.
Effective January 2020, Fidelity Contrafund K Shares, a mutual fund vehicle, was replaced with Fidelity Contrafund Commingled Pool Class 1 Units, a collective investment trust or “CIT.” The Trustees elected to make this change after careful consideration and input from the Plan’s Investment Consultant. The primary reason the Trustees decided to move from a mutual fund vehicle to a CIT, with respect to Fidelity Contrafund, was that Class 1 Units in the Contrafund CIT have a lower expense ratio than K Shares in the Contrafund mutual fund. (Expense ratio is the ratio of an investment vehicle’s operating expenses over its assets under management. Thus, the higher an investment’s expense ratio, the greater the drag on the investment’s return.) In short, the Trustees concluded that there was real cost-savings for participants invested in the Contrafund without any impact on investment performance.
At the same time, the Trustees acknowledge that this is one of the first times a CIT has been introduced to the Plan’s investment option lineup and many participants may not be familiar with this type of investment vehicle (IBEW-NECA Stable Value Fund is also a CIT). This educational article briefly outlines the similarities and differences between mutual funds and CITs.
A mutual fund is an investment vehicle made up of a pool of money from many investors to invest in securities. While the majority of the Plan’s investment options are mutual funds, mutual funds also give individual investors access to reasonably priced, professionally managed portfolios. Except for the recent addition of the Fidelity Contrafund CIT, all of the Plan’s other investment options are comprised of mutual funds.
Collective Investment Trusts are quite similar to mutual funds. However, they are only available to tax-qualified retirement plans like the Electrical Workers Local No. 26 Individual Account Plan. CITs are sponsored by bank or trust companies under the supervision of the U.S. Office of the Comptroller of the Currency (“OCC”) or state banking regulators. Also, unlike most mutual funds, CITs like Fidelity’s Contrafund Commingled Pool are subject to ERISA.
Mutual Funds v. CITs—Return of interest, dividends and realized capital gains.
Mutual funds can be owned by taxable individuals as well as tax-qualified investors. For tax reasons, mutual funds are legally required to return interest, dividends, and realized capital gains issued by underlying securities to the mutual fund shareholders. Mutual funds pay either quarterly or yearly distributions to investors regardless of whether they are held in taxable accounts or tax-deferred retirement accounts, although in the case of a qualified tax-deferred plan (e.g., Electrical Workers Local No. 26 Individual Account Plan), these amounts are not taxed until a participant receives a distribution from the plan.
Unlike mutual funds, CITs are not required to pay out interest, dividends, and realized capital gains to investors because only tax-qualified investors may invest in CITs. Consequently, interest, dividends, and realized capital gains issued by underlying securities in a CIT’s portfolio continue to accrue tax-deferred for all shareholders.
So how does this work?
When a mutual fund issues interest income, dividend income or realized capital gains to shareholders, the amount the mutual fund issues is generally reinvested to purchase more shares in the mutual fund, but there is a corresponding reduction in the net asset value (“NAV”) of the mutual fund—this results in no change to the shareholder value because NAV reductions are offset by the increases in the number of shares purchased.
CITs receive the same interest income, dividend income and realized capital gains that mutual funds receive, but because a CIT is not required by law to pass through this income to shareholders (because only tax-qualified retirement plans can invest in CITs), unlike a mutual fund, a CIT will not distribute this income to shareholders. Instead, interest income, dividend income and realized capital gains issued by underlying securities become part of the CIT’s NAV. This does not affect the CIT’s performance at all.
All other factors being equal, a participant’s financial position is no better or worse investing in the mutual fund version of the Fidelity Contrafund, which makes distributions, versus the CIT version of the Fidelity Contrafund, which does not. This is due to the financial concept of “dilution.” Dilution essentially means that while a mutual fund makes distributions based on the number of shares outstanding, the value of that distribution is offset by a corresponding reduction in the share price because the value of the distribution is no longer in the mutual fund.
Where to find more information about the Fidelity Contrafund Commingled Pool.
Unlike a mutual fund, a CIT like the Fidelity Contrafund Commingled Pool does not have a prospectus nor is a CIT’s holdings or performance information publicly available. A CIT, while not governed by a prospectus, is governed by its declaration of trust and investment policy statement. The fact sheet for the Fidelity Contrafund Commingled Pool, which provides, among other things, past performance information, calendar year return, expense ratio and investment approach information is available online at https://NetBenefits.fidelity.com.