Heads Up: The Fed continues to raise rates — up 3% this year — making credit card debt even costlier.
Pay it off today with a low fixed-rate personal loan. View your rate —>

What Is a Collective Income Trust (CIT)?

By Brian O'Connell · November 02, 2021 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is a Collective Income Trust (CIT)?

You may have heard of a collective investment trust, but what is a CIT, exactly? Also known as a commingled trust or collective trust fund, a CIT is a pooled investment fund that’s similar to a traditional mutual fund — but a CIT falls under a different regulatory path and may offer lower fees and tax advantages.

Similar to a mutual fund, a collective investment trust generally consists of assets pooled from investors — but in the case of a CIT the funds come only from qualified, employer-sponsored retirement plans, such as 401(k)s, pension plans, and government plans. They are typically not available to retail investors directly. So, while you might find a CIT available to you through a work-sponsored retirement plan, at the moment you couldn’t invest in one directly through your personal IRA, say.

Recommended: What is an IRA?

That said, CITs have grown in popularity in the last few years, owing to their lower cost structure and potential tax advantages. CIT’s are increasingly pervasive on the fund investment landscape. According to industry figures, the percentage of plan sponsors offering collective income trusts rose to 78% in 2020 from 44% in 2011.

Let’s take a closer look at how CITs work, and what they may offer investors.

How a Collective Income Trust Works

The goal for a collective income trust is to pool fund assets together into a single account (called a “master trust account”) and manage the investment funds in a highly diversified, low-cost manner. Although the trust is typically managed by a bank or trust company, the trustee can opt to hire an investment management firm in a sub-advisory capacity to manage the income portfolios.

The CIT investment process is fairly standard. Structurally, the bank or trust company will collect funds from various retirement-oriented investment accounts and commingle them into a single fund (i.e., the CIT), and thus become the trust’s “owner.” CIT investor participants don’t own any direct assets in the trust – instead they hold a participatory interest in the CIT fund assets (similar to the way investors hold mutual fund shares).

The trust, meanwhile, is free to invest in a wide variety of investment vehicles, including stocks, bonds, mutual funds, currencies, derivatives, or possibly alternative investments like commodities or precious metals. Strategically, the trust manager’s mandate is two-fold:

1.    Collect investment assets from participating investment plans and commingle them into a single fund.

2.    Manage the single fund like any mutual fund manager does – with a specific investment strategy, and goals and track the fund’s performance to ensure the fund is meeting its investment goals.

Collective Income Trusts vs. Mutual Funds

CITs are often compared to mutual funds because in both cases, investors’ assets are pooled and invested in a diversified portfolio of securities. Other than that, these two investment vehicles have some stark differences.

•   Individuals can invest in a mutual fund through an online brokerage or a personal retirement account like an IRA, but investors can only access CITs through an employer-sponsored retirement plan, pension plan, or insurance plan.

  Earlier this year, a bipartisan group in Congress pushed for reconsideration of the Public Service Retirement Fairness Act, a law that could change rules pertaining to 403(b) plans, typically used by teachers and other civil servants, to allow CITs as investment options in those plans. Those efforts are still underway.

•   A collective investment trust is not regulated by the SEC but overseen by the Office of the Comptroller of the Currency (OCC) for national banks or state banking authorities for state banks and the Department of Labor (DOL). As a result, a CIT is typically less transparent about its holdings.

•   Unlike a mutual fund, a collective income trust is not required to register under bylaws created in the Investment Company Act of 1940. Thus, because a collective investment trust isn’t subject to the same operational, disclosure, and reporting rules of federal and state securities laws, the cost to invest in a CIT is generally lower than a mutual fund.

•   Whereas mutual fund fees are set by the investment firm as an expense ratio and are non-negotiable, some CIT costs can be negotiated.

•   CIT earnings are considered a tax exempt investment, not merely tax deferred as mutual fund earnings within an employer-sponsored plan might be.

•  A collective investment trust is set up as a trust and offered by a bank, trust company or other financial institution, whereas a mutual fund is offered by an asset management company.

Recommended: How Do Mutual Funds Work?

A History of Collective Investment Trusts

Collective income trusts have been around for nearly a century. The first fund rolled out in 1927 on a limited basis. When the stock market crashed in 1929, CITs fell under additional scrutiny owing to the pooled nature of these funds, their lack of transparency, and the timing of the crash. Subsequently, CITs were significantly restricted by the government, which mandated that CITs could only be offered to trust company clients and through employee-sponsored retirement plans.

About 20 years ago, though, CITs began providing daily valuation and standardized transaction processing — in other words they began to operate more like mutual funds — which greatly increased adoption by defined contribution plans.

The real turning point came in 2006, when the Pension Protection Act provided for the use of Qualified Default Investment Alternatives (QDIA) for certain 401(k) plan investors. Target date funds, many of which include CITs, were designated as QDIAs, thus giving more investors access to CITs (although banks and trusts still couldn’t, and can’t, offer CITs directly to retail investors).

Since then, the cost efficiency of collective investment trusts has drawn the attention of many fund managers, and the use of CITs over traditional mutual funds in target-date fund series is growing, according to research company Morningstar’s analysis, with 43% of target fund assets invested in CITs at the end of 2020.

Collective Income Trusts: Things to Know

By design, collective income trusts offer several unique features — and potential drawbacks — for qualified retirement plan providers and their investors:

CITs as fiduciaries

CITs must abide by the rules and regulations laid out in the Employee Retirement Income Security Act of 1974 (ERISA). That means CITs must meet minimum standards of conduct, like requiring CIT providers to give investors critical information such as plan features and funding. As such, a CIT trustee is held to ERISA fiduciary standards for the ERISA plan assets invested in CITs.

CIT’s long-term focus

Unlike a mutual fund, a CIT doesn’t have to distribute 90% of its taxable income every year (mutual funds are regulated investment companies and are required to provide annual taxable income distributions to investors.) That allows collective income trusts to hold investment funds in the trust, allowing those investments to grow in value over time.

No FDIC coverage

Unlike bank deposits, investor deposits in a collective income trust are not insured by the Federal Deposit Insurance Corporation (FDIC). While investments in a 401(k) are not FDIC-insured either, if deposits (e.g. savings, money markets, CDs) are covered by an FDIC-insured institution, then the deposits are as well.

CITs and rollovers

Collective income trusts don’t offer the same investment portability of mutual funds. Trust customers have to liquidate their positions in the CIT into a cash account before they can roll over funds adding an extra step to the account rollover process. Thus, CIT investors should work closely with their plan sponsors when rolling plan funds over to another retirement plan.

The Takeaway

Now that we’ve asked, What is a CIT?, it’s time to recap this intriguing and little-known investment option. Although a collective investment trust is often compared to a mutual fund, the only two similarities of these vehicles is that they are both pooled investment portfolios, with funds from many investors commingled — and both are used in retirement plans.

For now, though, a CIT is only available to investors through certain qualified plans, including 401(k), pension, and government retirement plans, in addition to qualified profit-sharing and stock-bonus plans. Collective income trusts are becoming more common in the employment retirement plan universe, as more target date funds opt to include CITs. And there is bipartisan support in Congress for rules that would allow 403(b) plans to include collective investment trusts as an option for plan participants.

Other than that, CITs are really quite different from mutual funds. They follow a different regulatory flow and are not overseen by the SEC. With more room to operate in a regulatory sense than traditional mutual funds, CITs can offer clients a unique long-term investment option tailored to their investment management needs, and in a cost-effective manner — all managed in a single investment account.

Investing in a CIT through your company retirement plan does not preclude other investments, like setting up a SoFi Invest® account to invest directly in stocks, bonds, or ETFs — or open your own IRA online. In addition, becoming a SoFi Member gives you complimentary access to advice from professionals, who can help you consider how different retirement choices might work in your long-term plan.

Photo credit: iStock/izusek

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender