By Tim McLaughlin

BOSTON (Reuters) - Mutual fund companies, including No. 2 Fidelity Investments, have slashed fees on their most popular funds by shifting billions of dollars into collective trusts not regulated by the U.S. Securities and Exchange Commission.
The growing shift to collective trusts could prove a weapon for actively managed mutual funds losing out to low cost passive investment products such as the exchange-traded funds offered by rivals such as Vanguard Group, the biggest mutual fund company. For investors, one drawback is less transparency about the risks and performances of their holdings.
"CITs are more opaque to the outside world because reporting requirements are not as stringent," said Michael Rawson, manager of research at Morningstar Inc.    
Retirement plans sponsored by Delta Air Lines Inc cut fees by 23 percent last year when they shifted an estimated $1 billion in assets managed by Fidelity's Contrafund into a collective investment trust (CIT).
"The lower the expense of a fund, the less money taken out of overall earnings, which can translate into better returns for investors," Delta said in a letter to employees. The airline declined further comment.  
The $107 billion Contrafund, a staple offering in 401(k) and other U.S. retirement plans, still manages the money, but the Delta assets are no longer regulated by the SEC. Instead, the primary regulator is the state banking commissioner of Massachusetts, where the Fidelity Management Trust Company is chartered.            
As with other CITs, investors do not receive an SEC-required prospectus, a lengthy document that spells out investment objectives and risk. Ticker symbols and ratings from independent research firms such as Morningstar also are not generally available, according to analysts.
And the regulator for one CIT can differ from another, depending on where the trust is chartered, meaning they could be subject to different law. Invesco's is the Texas banking commission, for example, and BlackRock's is the Office of the Comptroller of the Currency, a bureau of the U.S. Treasury Department.
Assets in CITs are surging because they can have significantly lower overhead costs than the average mutual fund. CITs can only be offered to qualified retirement plans such as 401(k)s and analysts say their less stringent reporting requirements translate into lower operating expenses for fund companies. Meanwhile, there has been a rash of lawsuits in which employees accuse their employers of charging excessive fees in their 401(k) retirement plans.
Late last month, for example, the U.S. Supreme Court appeared set to revive certain claims in a class-action lawsuit against Edison International by employees who accused the utility of favoring higher-cost mutual funds over-lower cost ones in its retirement plan.
"These excessive fee cases will drive more retirement plan sponsors to look at collective investment trusts," said Kevin Lyman, assistant general counsel at Invesco Ltd, which manages about $61 billion in CIT assets. 
In recent years, research firms have estimated that CIT assets would top $2 trillion in 2015. But a Reuters analysis of disclosures by trust banks, including ones operated by BlackRock Inc, State Street Inc and Wellington Management, reveal that figure was easily surpassed in 2014. 
BlackRock and State Street's trust banks alone reported a combined $2.22 trillion in CIT-related assets at the end of 2014, according to banking disclosures. Fidelity's latest disclosure, the end of March 2014, showed $43.3 billion in CIT assets, up nearly $8 billion from the end of 2013.
Indeed, 60 percent of defined contribution plans offered collective trusts in 2014, up from 52 percent the previous year, according to a study by Callan Associates Inc, a consultant to institutional investors. 
To be sure, mutual funds remain the staple investment in defined contribution retirement plans such as 401(k)s. 
"But large-cap equity managers have the most pressure to lower fees," said John Akkerman, head of global distribution at MacKay Shields, an investment management company and unit of New York Life Insurance Company.  
Invesco's Lyman said regulation of collective trusts may get a slightly lighter touch because retirement plan sponsors serve as fiduciaries, offering a layer of oversight to participants.
"Like SEC regulation of a hedge fund, there's an element of a sophisticated investor being involved, the retirement plan," Lyman said. The U.S. Department of Labor and the Internal Revenue Service also provide oversight, he said.
CITs have been around since the 1920s, but actively managed mutual funds have a renewed sense of urgency in using them because each year for the past several years they have lost tens of billions of dollars in assets to passive index funds.    
In 2014, for example, investors made net withdrawals of $98 billion from actively managed stock funds while pumping $167 billion into passive stock investments such as exchange-traded funds, according to Morningstar Inc. Fidelity's Contrafund had net withdrawals of $11 billion in 2014, though about $6 billion of that amount went into CIT accounts, according to Lipper Inc data and Contrafund disclosures.   
About a year ago, Fidelity began offering collective trusts to clients with a $50 million minimum initial investment. The offer included moving assets from the lowest cost shares of Contrafund, the $44 billion Low-Priced Stock Fund and the $42 billion Growth Company Fund into collective investment trusts, according to the State Universities Retirement System of Illinois.
In the Delta example, Contrafund charged an expense ratio of 0.56 percent for its lowest cost K shares. After the shift to the collective trust, Contrafund's expense ratio dropped to 0.43 percent of assets, according to Delta's announcement to employees. 
Fidelity declined to make executives available for comment, but said in a statement that a small number of institutional clients transferred assets from some Fidelity mutual funds into collective trusts." 
"We continue to manage those client assets just in a different investment structure," Fidelity said in the statement.    
(Reporting by Tim McLaughlin; Editing by Richard Valdmanis and John Pickering)