An Up-Close Look At Target Date Fund Fees In Collective Investment Trusts

by: Ronald Surz
Summary

TDF fees are generally lower in CITs than in mutual funds.

Most mutual funds do not have a CIT alternative, so the choice between the two is not straightforward.

CITs have an additional benefit. They serve as fiduciaries, whereas mutual funds do not.

There is increasing interest in using Collective Investment Trusts (CITs) instead of mutual funds in target date fund (TDF) investing primarily because we've been told that CITs are cheaper. Essentially the same portfolio that is offered in a mutual fund TDF can be purchased for a lower fee as a CIT. In the following, we take an up-close look at these common beliefs and find that (1) CIT TDFs are indeed generally less expensive than mutual fund TDFs and (2) only a few mutual fund TDFs have a CIT alternative. Generally speaking, if you're looking to use a CIT, it will likely be an offering that is only available as a CIT.

CITs are desirable because of their lower fees and because they serve as fiduciaries to the pension plan, but only ERISA plans may invest in them.

Overview

There are 53 CIT families on the Morningstar database. 47 are less expensive than the average mutual fund fee of 63 bps. The average CIT fee is 44 bps. 15 CITs are also offered as mutual funds, and all 15 are less expensive.

The following table provides the details.

Sorted by CIT Name

Sorted by CIT fee

CIT

Mutual

CIT

Mutual

Alliance Bernstein

47

91

BlackRock Conserv

1

Allianz

54

66

State Street

3

9

American Century

39

79

NT Focus

5

Aon Hewitt

40

Aon Hewitt Index

6

Aon Hewitt Index

6

Comerica

6

BCM

45

Schwab Index

8

8

BlackRock

19

19

Wells Fargo

8

29

BlackRock Conserv

1

FRS

10

BNYM

11

Stadion

10

Callan

63

TOPS

10

Comerica

6

BNYM

11

Crow Point

150

GoalPath

11

FACETS

30

flexFIT

12

FIAM

24

Index Select

14

FirstTrust

65

Morningstar

16

flexFIT

12

Blackrock

19

19

flexPATH

44

JPMCB

21

33

FMT/Vanguard

50

Manning & Napier FI360

21

FRS

10

FIAM

24

FSI

215

MercerWise

26

GoalPath

11

Putnam

28

96

Great West

40

97

Sage

29

Index Select

14

Smart Lifecycle

29

JPMCB

21

33

FACETS

30

Legg Mason

50

T Rowe Price

30

69

Manning & Napier FI360

21

Prudential Day One

34

48

Manning & Napier RT

50

American Century

39

79

MAP

73

Aon Hewitt

40

MercerWise

26

Great West

40

97

Morningstar

16

SMART

42

NT Focus

5

Voya

43

51

PGI Principal

60

flexPATH

44

Principal Lifetime

50

80

BCM

45

Prudential Day One

34

48

Schwab Managed

45

57

Putnam

28

96

Alliance Bernstein

47

91

Russell

50

FMT/Vanguard

50

Sage

29

Legg Mason

50

Schwab Index

8

8

Manning & Napier RT

50

Schwab Managed

45

57

Principal Lifetime

50

80

SEI

50

Russell

50

SIA

59

SEI

50

SMART

42

Vantagepoint

50

Smart Lifecycle

29

Wellington

50

Stadion

10

Allianz

54

66

State Street

3

9

SIA

59

Strategic

72

PGI Principal

60

T Rowe Price

30

69

Callan

63

Mutual Fund Avg

TOPS

10

FirstTrust

65

Trademark

75

Strategic

72

Vantagepoint

50

MAP

73

Voya

43

51

Trademark

75

Wellington

50

Crow Point

150

Wells Fargo

8

29

FSI

215

Source: Morningstar and Target Date Solutions

Savings over mutual fund counterpart

15 CITs have mutual fund offerings as well. The average mutual fund fee across these 15 offerings is 55 bps, which is 12% higher than the 49 bps average CIT fee, but the savings vary widely by fund company as shown in the next graph:

How to use this information

Because of the proliferation of successful lawsuits that are based on excessive fees, fiduciaries are seeking the lowest cost TDFs they can find. Expanding your search to include CITs will be productive in this pursuit. But please bear in mind that fees are only one aspect of prudence. Some low-cost TDFs are imprudent, and some higher-cost TDFs are prudent.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a sub-advisor of the SMART TDF Index and the originator of the 1st and only Robo Analyst that integrates Age with Risk. Please visit my Blog at seekingalpha.com/...

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