Overtaking Mutual Funds: The Hidden Rise and Risk of Collective Investment Trusts
abstract. The retirement security of millions of American workers is increasingly tied to an investment vehicle that most have never even heard of, and whose dramatic rise has received almost no regulatory scrutiny in recent decades. With nearly seven trillion dollars in assets, “collective investment trusts” (CITs) are rapidly replacing mutual funds on the investment menus of employer-sponsored retirement plans. Individuals who once had staked their retirement nest eggs on the returns from mutual funds have had more and more of their savings transferred into bank-sponsored CITs, which now hold nearly thirty percent of all assets in defined-contribution plans, up from just thirteen percent a decade ago. Legislation to expand access to CITs is currently pending in Congress. Yet despite such dramatic growth and economic significance, CITs—which look and act a lot like mutual funds but are sponsored by banks and subject to oversight by the Comptroller of the Currency—have been largely overlooked, with almost no critical analysis of CITs as investment funds, as institutional investors, and as increasingly important participants in an interconnected financial system.
This Essay tells the story of a century-old bank product seizing on regulatory gaps and exploding in popularity among retirement plans seeking cheaper investment options for individual participants. The dramatic growth of CITs raises new and critical questions about the tradeoffs associated with CITs: in particular, the benefits of lower fees versus the individual and systemic risks that may stem from lower transparency, fragmented regulatory oversight, fewer restrictions on permitted investments, and centralized control in the hands of bank trustees. In identifying these tradeoffs, this Essay shines a light on the policy implications for retirement savers and builds the foundation for future scholarship to improve our understanding of this behemoth investment vehicle, whose growth and impact have gone largely unexamined over the last four decades.
author. Associate Professor of Law & Donohue Faculty Fellow, Boston College Law School. Thank you to Mary S. Bilder, William A. Birdthistle, Felipe F. Cole, Jens C. Dammann, Joseph A. Franco, Mira Ganor, Renee Jones, Ray D. Madoff, Patricia McCoy, Elizabeth Pollman, Diane Ring, Roberta Romano, Chester S. Spatt, Andrew Verstein, and the participants of the 2023 Berkeley Forum on Corporate Governance, the 2024 N.Y.U./Penn Conference on Law and Finance, the UCLA Business Law Workshop, the University of Texas Business Law Workshop, the 2024 American Law & Economics Association Annual Meeting, and the Boston College Law School Summer Faculty Workshop for helpful feedback. Thank you also to Karen Breda, Scott Sheltra, and the Yale Law Journal editors. All errors are my own.
Introduction
The retirement security of millions of American workers increasingly depends on a little-known investment vehicle whose dramatic spread across retirement-plan portfolios has received almost no regulatory scrutiny over the last four decades.1 With nearly seven trillion dollars in assets, “collective investment trusts” (CITs)2 are rapidly replacing mutual funds on the investment menus of employer-sponsored retirement plans in both the private and public sectors.3 Individuals who once had staked their retirement nest eggs on the returns from mutual funds have had more and more of their savings transferred into bank-sponsored CITs, which now hold nearly thirty percent of all assets in defined-contribution plans, up from just thirteen percent a decade ago.4 With trillions of dollars in assets and with pending legislation that would expand their reach further, CITs are also growing in size and power, not only as retirement-savings vehicles, but also as institutional investors acting without the accountability or transparency requirements applicable to mutual funds.5
What are CITs? Given the lack of familiarity with the term, CITs are commonly defined by reference to or by comparison with the very thing that they are replacing: the mutual fund.6 For example, they have been described as “the functional equivalent” of mutual funds,7 as investments that “look and feel a lot like a mutual fund,”8 and as “the biggest competitive threat” to mutual funds in the defined-contribution market.9
But CITs are not mutual funds. Although the two are “functionally similar”—both offer pooled investment vehicles that combine assets from eligible investors into a single fund with a specific investment strategy—mutual funds and CITs are subject to very different governance and oversight regimes.10While mutual funds are set up by investment-management companies,11 widely available to the general public, and regulated by the Securities and Exchange Commission (SEC),12 CITs are set up by banks or trust companies,13 available to individuals only through employer-sponsored retirement plans,14 and regulated primarily by the Office of the Comptroller of the Currency (OCC) and, in some cases, by the Department of Labor (DOL).15
Relative to mutual funds, CITs face fewer restrictions on the
types and composition of permissible investments16 and fewer registration and
reporting requirements.17
The Investment Company Act of 1940 and the Securities Act of 1933 exempt CITs
and CIT interests from registration with SEC and from substantive requirements
under those laws.18 Since they are
normally exempt from SEC registration, CITs do not need a registration
statement or a prospectus for prospective purchasers.19 Accordingly, there are no
registration fees to be paid to SEC and no registration statement subject to
SEC review.20Similarly,
although CITs, like mutual funds, hold shares of public companies and exercise
the corporate voting rights afforded to such shares, CITs are not subject to
the securities-law requirements to disclose their voting records publicly or
give fund investors “voice” in fund governance.21 Instead, CITs entrust
management responsibility to the bank trustees, who cast votes on behalf of the
trusts.22 As a result, “it is faster and
cheaper to create and launch a CIT than a comparable mutual fund.”23
The lower compliance and marketing costs are credited as a key reason for CITs having lower fees than comparable mutual funds.24 Morningstar, the investment research firm whose subsidiary provides advisory services to CITs, reports that “[w]hen comparing the net expense ratio of CIT tiers and mutual fund share classes of the same strategy, CITs are cheaper 88% of the time; and considering only the least-expensive CIT tier and mutual fund share class, CITs are cheaper 92% of the time.”25 According to Morningstar calculations, “[a]cross all investment strategies, as of year-end 2020, the average passive CIT costs less than the average passive mutual fund. Similarly, the average active CIT costs 60% less than the average active mutual fund.”26
These cost differences matter because even seemingly small differences
are compounded over decades.27 In an environment where
retirement-plan sponsors (that is, employers) have faced significant litigation
risk over excessive retirement-plan
fees,28 the existence of lower-fee options that offer the
same or similar investment strategies to those offered by mutual funds has
precipitated the exodus from mutual funds into CITs. Importantly, the
management companies most commonly associated with mutual funds—including
Fidelity, Vanguard, and State Street—have all started to offer CITs through
affiliated trust companies or banks.29
The growth of CITs over the last decade has outpaced predictions,30 with CITs now “a standard part of the largest plans in the U.S.” and increasingly present in plans of all sizes31 in both the public and private sectors.32 Plan menus that once included primarily mutual funds now increasingly offer CITs. Target-date funds, which have been particularly popular on retirement-plan investment menus, are now offered through CIT vehicles rather than through mutual funds.33 The same is true for equity, debt, and alternative investment strategies. Consider, for example, the Facebook/Meta Platforms Inc. 401(k) Plan. In 2009, nearly all the assets in the plan were invested in mutual funds.34 By 2021, nearly all the assets in the plan were invested in CITs.35
According to Morningstar, “[t]he largest plans in the U.S. started to abandon mutual funds 10 years ago,” and CITs have grown from thirteen percent of assets in defined-contribution plans in 2012 to twenty-eight percent of assets in 2021.36 The growth of assets in CITs has dramatically outpaced the growth of assets in retirement plans generally and the growth of assets in mutual funds.37 Even smaller employers have begun to add CIT options on plan menus,38 while CIT sponsors and industry advocates have been lobbying Congress to make CITs available to retirement plans in the nonprofit and education sectors, which have not been allowed to participate in CITs to date.39 Legislation to expand access to CITs was reintroduced in Congress in 2025.40
The dramatic rise of CITs has not been accompanied by a corresponding increase in scholarly or regulatory analysis. Indeed, although CITs were the subject of robust congressional and scholarly examination in their early years and through the 1970s, they have received scant scholarly or regulatory attention over the last four decades.41 This Essay begins to fill the gap and makes the case that CITs—although not squarely within the domain of any one academic discipline—should be of interest to scholars of banking law, corporate law, securities law, and employee-benefits law. Indeed, their interdisciplinary nature makes CITs an important case study in financial instruments operating at regulatory crossroads and taking advantage of the challenges of interagency coordination.
Part I traces the evolution of CITs in the United States, with a particular focus on the dramatic growth of CITs in defined-contribution retirement plans. It shows how over the last hundred years, a type of bank trust originally intended for the fiduciary administration of small accounts has evolved and exploded into a powerful industry managing seven trillion dollars of retirement savings belonging to American workers. The recent exodus of assets from mutual funds into CITs can be explained by three key drivers. First, employer interest in cheaper investment options for plan menus, driven in part by increased retirement-fee litigation, has bolstered demand for CITs.42 At the same time, the competition for the business of managing retirement assets has encouraged not only banks but also mutual-fund management companies to ramp up their CIT offerings. The management companies that once lobbied intensely against CITs have set up trust subsidiaries and affiliated banks to establish their own CITs. Once in the CIT business, the financial institutions have likely come to appreciate certain regulatory differences, such as the ability to cast contentious or politically fraught proxy votes without having to report their voting records to the public.43 In fact, CIT providers have been lobbying Congress to expand access to CIT products.44
After describing the evolution of CITs, the Essay turns to the current state of the CIT market. Part II first synthesizes available data on the prevalence of CITs, their sponsors, and the underlying investments. It then reviews the unique regulatory framework for CITs and shows that what has made CITs attractive to industry participants may also explain the lack of regulatory and academic attention to these investment vehicles. Next, Part II revives the debate about “functional regulation” and the question whether financial instruments that perform similar functions should be regulated similarly. This debate, which featured CITs quite prominently in the 1960s and 1970s, has waned in the ensuing decades. The recent dramatic growth of CITs merits reopening the discussion.
The Essay then evaluates the impact of CITs, which, in the absence of “functional regulation,” are subject to a regulatory regime that is strikingly different from the one applicable to mutual funds. Part III situates CITs in the theoretical framework for investment funds and shows that employers play an outsize role in protecting the interests of individual investors in CITs. It examines CITs’ growing shareholder activism, brings to light the lack of proxy-vote disclosure requirements, and explores the risks of “financial fires” stemming from regulatory gaps in an interconnected financial system.45
Part IV then turns to the benefits and costs of CITs as a retirement-savings vehicle. It emphasizes that the regulatory framework for CITs predates the rise of defined-contribution retirement plans in which individual participants bear the investment and longevity risks. Although lower fees in retirement plans are an important and attractive feature, the lower fees currently come at the expense of transparency and disclosure, including public disclosure about CIT fees. In the absence of robust public disclosure and public familiarity with CITs, there is increased pressure on plan sponsors (that is, employers) to negotiate and monitor custom fee arrangements with bank trustees. At the same time, the relatively limited public disclosure reduces monitoring by third parties and makes it more difficult for plaintiffs to bring litigation challenging the inclusion of CITs on retirement-plan menus. The Essay concludes with a call for closer examination of the tradeoffs in the recent embrace and potential expansion of CITs.