Jason Zweig’s Dec. 5 article “Do You Really Know What’s Inside Your 401(k)?” catastrophizes about collective investment trusts (CITs) and ignores the reasons they’ve become the dominant professionally managed investment vehicle for target-date funds. When comparing net expense ratios between mutual fund share classes and CIT tiers, Mr. Zweig omits a key point: CITs are less expensive 88 percent of the time. Affordability, the persistent risk of litigation over excessive fees, and better risk-adjusted returns are significant reasons why CITs surpassed mutual funds in terms of target-date fund assets last year.
As CITs grow within Americans’ defined contribution retirement plans, the fiduciaries’ standards of loyalty and prudence remain strictly binding. They are legally obligated to minimize 401(k) plan expenses. The addition of private assets to retirement plans does not change this obligation. Employees will have access to investments previously restricted to large institutions and wealthy individuals. Private assets in these CITs will be valued monthly through a process that includes internal and independent third-party reviews by valuation advisors and external auditors. Independent agents may then develop daily valuation models that leverage this monthly valuation process.
Liquidity will also continue to meet beneficiaries’ needs. The U.S. Department of Labor, which governs private-employer-sponsored retirement plans, is likely to require these funds to hold a majority of their assets in liquid form, thereby mitigating concerns about withdrawals.
Employees with defined contribution plans are not losing anything by adopting CITs. Mr. Zweig asks if employees know what’s inside their 401(k)s. Here’s the most straightforward answer: their CITs deliver the same benefits, simplicity, and safety as mutual funds at a lower cost.