Low fee 401(k) option, benefits and downsides

Collective investment trusts are increasingly popular in 401(k) plans. Some 70 percent of plans with more than 1,000 employees offer them either as an option or as their sole investment. Their popularity is growing rapidly. More than 770 collective trusts have been started since 2000. Although exact numbers are hard to come by, estimates are that there are about 2,000 CITs in 401(k) plans.

CITs are similar to mutual funds in their investment goals but are regulated by banking rules not securities regulations.

There are many advantages and some disadvantages to CITs.

ADVANTAGES

—Lower costs. Unlike mutual funds there’s no branding or marketing to the public because CITs are only available to companies offering retirement plans. That eliminates marketing expenses. Costs are further reduced because there’s no cost for an independent board, no Securities and Exchange Commission and state filings, no prospectuses and a lower record keeping burden overall.

—Negotiable pricing. Companies can negotiate fees that may be as much as half those of comparable mutual funds.

—Can be customized. CITs can be created for a specific company plan — for example, Time Warner screened out exposure to media stocks to prevent employees who own company stock from being overexposed to that sector.

—Range of investments. Wide array of investments can be included, among them, hedge funds, real estate investments, and other alternatives.

DOWNSIDES

—Limited information. Participants can’t see pricing or performance details to make relative comparisons as easily as they can for mutual funds.

—Minimal reporting. Some money managers only provide quarterly returns.

—More complex transfers. Employees can’t roll money over directly to another 401(k) or IRA. They must first cash out of the collective trust then move the cash to a new retirement account.

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Source: Morningstar Inc.