401(k) Sponsors Migrate toward Institutional Vehicles

As they look to cut fees, corporate 401(k) plan sponsors are continuing to opt for institutional pools over institutionally priced mutual funds, according to research by Cerulli Associates.

At year-end 2007, commingled investment trusts (CITs) and separate accounts accounted for 38.4% of total 401(k) assets, up from 35.3% at the end of 2006, according to the firm.

As large plans embrace lower cost, they look to CITs and separate accounts, which can charge as much as 50 basis points less in fees than a retail mutual fund, Cerulli said. With nearly $1.2 trillion in assets as of year-end 2007, those institutional vehicles represent 20.3% and 18.1% market share, respectively. “Large plans, which hold a majority of the 401(k) assets in the industry, seek alternatives to mutual funds in an effort to lower the investment expense, which is the single largest cost in their programs,’ said Tom Modestino, senior analyst, in the release.

CITs and separate accounts offer the same investment strategies as their retail counterparts, but are a cost-effective alternative, according to Cerulli.

“Plan sponsors’ decision-making is increasingly moving to the finance side of the business under the purview of the chief financial officer, where defined benefit responsibilities typically reside—the cost savings mindset is being carried over into defined contribution 401(k) plans. As a result, plans increasingly seek alternatives to mutual funds,’ Modestino said.


The research is from Cerulli Quantitative Update: Retirement Markets 2008. More information is available at www.cerulli.com.

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