CITs Are ‘Ideal’ for Access to Private Markets, per Cerulli

As defined contribution plans begin to consider how they can integrate private market strategies into their investment offerings, collective investment trusts may be an optimal method of delivery, according to Cerulli Associates’ latest “Cerulli Edge—U.S. Institutional Edition,” published November 18.

CITs accounted for approximately 38% of total 401(k) channel assets at year-end 2023, up from 30% at the end of 2019, according to the report. While the market share of CITs ticked up over the four-year period, allocations to standalone mutual funds decreased to 39.6% at year-end 2023 from 48.2% at the end of 2019.

Most asset managers that Cerulli surveyed said they planned to offer DC plans a range of sub-asset classes within CITs. This includes private real estate, which 36% of DC asset managers currently offer to their DC clients, and another 23% plan to offer, according to the report. Asset managers also viewed private credit as a potential early area of adoption by DC plans, with 20% of those surveyed currently offering it and 48% stating they plan to offer it in the future.

According to the report, all DC executives Cerulli spoke with as part of a 2025 research initiative agreed that the attributes of a CIT make it the “ideal structure through which to provide access to private markets.” One feature of a CIT many considered favorable is the unique role a trust company plays as the vehicle’s fiduciary—including the expertise the companies can provide in bringing private market strategies to the DC channel.

Some trust companies are still hesitant about the role they want to play as trustees for CITs, however. Cerulli advised that plan sponsors and intermediaries should conduct careful evaluations of the trust companies with which they are considering working.

Is Cost Everything?

Firms also need to navigate “the perception that cost is everything in DC,” says Brendan Power, a co-director of product development at Cerulli. He says the onus is on CIT product manufacturers to show that the value participants get in investment returns, as well as the diversification of incorporating private market assets within them, offsets and exceeds the additional costs the asset classes pose.

While CITs generally are available to participants at lower fees than mutual funds, private market funds are inherently more expensive to offer due to their greater operational expenses. Even when combined with the lowest-cost index strategies and other less expensive solutions, they will still cause the overall price on investments to increase, the report stated.

“Wrapped within that is the fear of litigation,” says Powers.

The report noted that in part because of litigation concerns, plan sponsors have tried to make “ultra-low-cost” investment options available to plan participants. BlackRock and Vanguard, for instance, offer passive public market products that are priced in the single-digit basis points. Those options are often placed alongside purely active solutions and funds that are both actively managed and passively managed.

Breaking Inertia

Powers also notes that the DC ecosystem is influenced by “inertia,” which he describes as “a pushback to change.” While CITs are already well-adopted by many DC plan sponsors and their intermediaries, the private market sector has not traditionally leveraged them.

The industry “has to figure out how to break that inertia,” says Powers. “Part of that is making these products a bit more amenable to the existing ecosystem.”

One of Powers’ suggestions is for investment providers to enhance the liquidity of the product they offer. He says one example of doing this is by building a liquidity sleeve into a standalone CIT that is used as a building block for a managed account. The report stated that as with offering liquidity at the sleeve level of a target-date product, wrapping a private market strategy within a CIT (e.g., with 80% private equity and 20% cash or public equity) can help make the private exposure “less pure play,” and possibly dampen its addition to investment returns.

The report stated that the asset managers and CIO trustees building CITs, are also working to ensure that daily valuation is available for trusts containing private assets. The manufacturers are developing processes using a combination of direct valuations and estimation processes using indirect valuations, according to Cerulli.  If they do this, they also have to manage to match, and rationalize, derived valuation with actual valuations, which are much less frequent in many private markets.

“To accomplish this, managers should design part of their process to focus on mitigating true-up risk, or the adjustments to the fund NAV as actual underlying valuation changes accounted for on a monthly or quarterly basis, against the estimates considered on a daily basis,” the report suggested.