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An increasing number of employees at large companies might have noticed a type of investment option available in their 401(k) plans which looks like a mutual fund - but it isn't. These investments, known as collective investment trusts (CIT) or collective trust funds, can be much more profitable than mutual funds with similar strategies. It's important to understand the difference if you have the option of investing in a collective trust.

First, lets explain the differences between collective trusts and mutual funds. Mutual funds pool money from multiple individual investors into the same mutual investment. There can be multiple money managers responsible for the maintenance of the fund, including buying and selling investments on behalf of the fund. Similar to a mutual fund, a collective trust is formed by pooling money from investors and maintained by money managers. However, the investments are exclusive to institutions - i.e. money comes from their 401(k) plans - and closed to private investors.

What is the cost advantage of collective trusts and why should you care? Collective trusts can operate with lower compliance costs than mutual funds for two reasons. First, because the institution is offering the investment to a large number of employees, they can negotiate a lower cost due to the higher supply of money they are providing. Secondly, trusts are overseen by banking regulators rather than the Securities and Exchange Commission (SEC). As a result, collective trusts do not have to abide by as many regulatory laws and typically have lower expense ratios than mutual funds since they do not have as many costs to pass on to the investor. If you are researching a particular collective trust, you will notice that it does not have a ticker. This is because they are not regulated by the SEC and do not play by the same rules as other investments, such as mutual funds.

Since collective trusts are essentially the same as mutual funds, but are less expensive to the investor, one may think the decision to invest in collective trusts is a "no-brainer." However, there is a downside associated with not having to comply with as much regulation. For example, although the lack of SEC oversight is an advantage from a cost perspective, it results in less transparency in terms of the fund holdings. One may find it more difficult to compare collective trusts to other investments since they are not required to disclose as much information.

Despite the alleged decreased level of consumer safeguards, about 45 percent of 401(k) plans include collective trust options. You're more likely to have collective trusts in your retirement plan if you work for a company with more than 1,000 employees. About 70 percent of larger companies offer CITs, according to Morningstar.

In conclusion, the difference between mutual funds and collective trusts may seem minimal on the surface, but the details could result in hundreds of thousands of dollars difference in your 401(k) retirement account over 30 years. Collective trusts can be especially confusing to the inquisitive investor due to the similarly named mutual funds with similar investing strategies. However, the Department of Labor is slated to roll out new rules for retirement plan sponsors which may clarify the options made available by your company. Until then, you should take the initiative to identify and research collective trusts - they may be a very appealing addition to your retirement portfolio.

For more personal finance tips about collective trusts versus mutual funds and much more, visit ModernSaver.com.