Many 401(k)’s have long used target date funds, allowing participants to “set it and forget it” based on their expected retirement date. Leave it to the “smart” guys in finance to stuff them with complexity, higher fees, and more risk. The trend toward using collective investment trusts (CITs) in target date funds has led to potential opacity in the funds’ holdings. Jason Zweig explains in The Wall Street Journal:
CITs are overseen by bank regulators, not by the Securities and Exchange Commission. Unlike mutual funds, they aren’t sold directly to the general public, so their lower marketing and regulatory costs typically make them cheaper.
So far, so good. The shift to CITs—which have grown to 52% of all target-date assets, or nearly $2.1 trillion—has helped drive down costs for retirement savers.
However, CITs could end up as a gateway for higher costs, higher risks and lower visibility. CITs disclose some information about their fees and holdings, but “nowhere near what a mutual fund offers,” says Janet Yang Rohr, an analyst at Morningstar.
For instance, the prospectus of a target-date mutual fund must report all the fees of all its underlying funds. A CIT, though, can invest in funds that don’t disclose every layer of fees in their own expense ratios, making it much harder for investors to figure out their true cost. That’s music to the ears of the firms that manage assets that don’t regularly trade in public markets, such as venture capital, private equity or nontraded real estate—where annual fees can hit 2% to 8% or more.
Under SEC rules, mutual funds can’t hold more than 15% of net assets in illiquid investments.
CITs have no such limits. Some big firms are already assembling CITs that may invest up to 20% in private assets, and there’s little to stop that number from going higher.
In theory, a target-date CIT could hold big blocks of assets that don’t trade for months or years at a time, even though 401(k)s are expected to offer participants the right to trade on any given day.
Will the valuations always be fair? Will every level of fees be clearly disclosed? Who knows?
Action Line: “Who knows?” is not a phrase you want applied to your retirement savings. When you want to make a plan for your retirement, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
