A former SEC official compares CITs to buying a car without a seatbelt — and they're taking over Americans' 401(k)s

CITs are cheaper for employers to offer workers than mutual funds because there is no requirement for trusts to register with the Securities and Exchange Commission (SEC), which incurs costs like marketing and distribution fees (2). Products are also offered by banks that act as fiduciaries and therefore are overseen by the Office of the Comptroller of the Currency (3).

Critics argue this means CITs aren't subject to the same level of scrutiny and disclosures mutual funds are. The OCC isn't as equipped in handling retirement products and ensuring investor protections as the SEC, they add. A former SEC official told Bloomberg that CITs make investment decisions like mutual funds, but "are not regulated like one."

"You can save money when you're buying a car by not having to pay for a seatbelt," he added. "But it isn't always the best."

How do CITs differ from mutual funds?

CITs (4) are a pooled investment option that combines the money of multiple investors into a single portfolio. Unlike mutual funds, which can be purchased even outside of your work plan, CITs are only available through tax-qualified retirement plans. In other words, you can't just open a brokerage account and buy shares in a CIT.

CITs can hold the same assets as mutual funds in your 401(k). But they tend to charge lower fees because they're regulated differently. Without SEC oversight (5), compliance and administrative savings can be passed down to plan participants via reduced fees.

Currently, CITs are a multitrillion dollar business, just like mutual funds. But the cost incentives are making them more lucrative to offer employees, especially by larger employers. If plan sponsors can meet contribution limits, then CITs may make more sense for them. However, mutual funds could be a better fit for smaller plan sponsors (6).

How prevalent are CITs in 401(k) plans?

In short, very. But estimating total assets held in CITs is incredibly difficult. Researchers largely rely on self-reporting by banks and surveys. The industry is so fragmented that it's hard for experts to really keep their finger on the pulse.

Since CITs aren't required to issue prospectuses like mutual funds, what they end up reporting depends on whether the trusts are registered at the federal or state level, according to Bloomberg. Many actually do, probably to a sufficient degree for plan sponsors and participants, but the lack of public information makes it difficult for experts to evaluate the industry.

Most estimates place the CIT market at or around $6 trillion to $7 trillion in assets. That's compared to $31.4 trillion invested (7) in mutual funds.