The Markets August 27, 2020

Future Trends in CIT Product Development

Although collective investment trusts hold a fraction of the total assets in retirement plans, with ongoing changes in the broader intermediary landscape, they appear to be poised for continued growth.

Reported by


Collective investment trusts (CITs) have become an important tool in the defined contribution (DC) plan market, in large part because of their low cost and customizability. This alignment has led to a significant increase in the development and use of CITs over the past several years, and new developments could further increase the demand for CITs.

A Changing Intermediary Landscape

CIT industry assets more than tripled in the 10 years ending in 2018, research shows, climbing to $3.1 trillion by year-end.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Although CITs are a fraction of the total assets in DC plans compared to mutual funds, with certain ongoing changes in the broader intermediary landscape, they appear to be poised for continued growth.

CITs are still most prevalent in the large end of the DC market, where national consultants—who, as of 2019, advise nearly $3.5 trillion of the $8 trillion in DC assets—are increasingly pushing large plan sponsors toward the vehicle. Such national consultants include Mercer, Aon, Willis Towers Watson, etc.

In this market segment, the percentage of plan sponsors using CITs has increased from 44% in 2011 to 75% in 2019, as shown by the Callan Defined Contribution Trends Survey 2020. Having found success and growth in the large end, these consultants have started applying their investment expertise in the smaller-plan market. Some national consultants are even starting to work with plans as small as $50 million in assets, bringing institutional investment solutions such as CITs that were previously only available to large plans.

As consultants shift to the mid-market, they play against a set of rapidly growing distribution powerhouses in the form of the aggregator firms, which can also use economies of scale to deliver more sophisticated investment solutions to smaller plan clients. Over the past five or 10 years, this group of roughly 15 leading benefits providers and registered investment adviser (RIA) firms has built specialty retirement practices and, through continued acquisitions, has grown to advise more than $1.4 trillion in DC retirement assets. While aggregator firms gain market share in the mid-market, they are also moving upstream and beginning to serve large- and even mega-plan sponsors. 

A Shift in Target-Date Offerings

Beyond these developments, a set of overarching industry trends also supports a case for continued CIT growth. Sponsors and participants are demanding more personalized retirement solutions that account for a participant’s broad financial picture. To meet these demands, intermediaries are creating custom investment products and managed account offerings tailored to the sponsor’s and participant’s needs.

Since the Pension Protection Act of 2006 (PPA), off-the-shelf target-date funds (TDFs) have dominated the DC space. However, driven by fee pressure from plan sponsors and increased demand for customization, asset managers are positioning cheaper—and often identical—CIT options alongside their standard mutual fund offerings and seeing significant uptake.

In addition to “cost,” the target-date CIT trend is also driven by the ability to tailor the investment to a plan or intermediary firm. With the growing trend of custom investments in the target-date slot, CITs are poised to be the vehicle of choice. 

A Bright Future

While the growth of CIT assets in DC plans is already significant, several new developments in the rapidly changing DC landscape are laying the groundwork for additional future growth. These developments include, for example, the rise of open multiple employer plans (MEPs).

Despite the lowering and even elimination of minimum investment requirements helping CITs move more into the mainstream, the CIT presence in the under $10 million market is still limited. With the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, however, non-affiliated employers can now join forces to offer a single plan, promising a much broader adoption of MEPs in the form of pooled employer plans (PEPs). 

Another broad trend to consider is the growing focus on retirement income. The SECURE Act includes a provision to provide plan sponsors that adopt annuity products with long-sought safe harbor protections. Much like with open MEPs, the industry is seeking additional clarification about several gray areas. Despite these open questions, leading insurance firms are looking to build new income solutions for retirement plans.

Unlike 401(k) plans, 403(b) plans are at this point prohibited from using CITs, with one exception being church plans. Many investment firms and industry associations have been lobbying to allow CITs in all 403(b) plans. There are two important reasons recordkeepers are pushing to include CITs in 403(b) plans. The first is cost savings. The second is consistency—meaning that schools, hospitals and other nonprofits should have access to the same investment vehicles as private sector employees.

A Time for CITs to Shine

Driven largely by an industry-wide focus on lower fees and increased flexibility, CITs have grown significantly in the past decade. With these secular trends continuing in the DC market, we expect CITs to grow at a faster pace going forward. To take advantage of this demand, asset managers should create a diverse set of products, vehicles and solutions, including an array of low-cost CITs focused on personalization and custom solutions.

 

Editor’s note: Robb Muse is an executive vice president at SEI Trust Company.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

Compliance August 26, 2020

Fund Argues Court Decision Shields PE Firms From Multiemployer Plan Withdrawal Liability

The New England Teamsters and Trucking Industry Pension Fund, in its long-running legal attempt to collect withdrawal liability, has filed a petition with the U.S. Supreme Court.

Reported by

The New England Teamsters and Trucking Industry Pension Fund has filed a petition with the U.S. Supreme Court in its long-running legal attempt to collect withdrawal liability from two entities of Sun Capital Partners as members of an implied partnership-in-fact under “common control” with Scott Brass Inc. (SBI), a withdrawing employer from the fund.

The petition asks whether the 1st U.S. Circuit Court of Appeals’ holding that the Sun Funds did not form a partnership-in-fact is inconsistent with the Supreme Court’s precedent in Culbertson v. Commissioner and presents a conflict among the circuits. It also asks whether the 1st Circuit’s analysis has created a judicial exemption shielding private equity funds from withdrawal liability in contravention of the purpose of the Employee Retirement Income Security Act (ERISA) and the Multiemployer Pension Plan Amendments Act (MPPAA).

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The 1st Circuit reversed a U.S. District Court ruling that there was an implied partnership-in-fact which constituted a control group and made the two funds liable for the pro rata share of unfunded vested benefits owed to the pension fund. The 1st Circuit reversed the decision because it concluded the multi-factored partnership test set forth in the case of Luna v. Commissioner had not been met, and it couldn’t conclude that Congress intended to impose liability in this scenario.

In its petition, the New England Teamsters and Trucking Industry Pension Fund said the appellate court’s decision reversing the district court’s finding of a partnership-in-fact is based on its “reluctance” to impose withdrawal liability for private equity funds and provides “a blueprint for such funds to escape withdrawal liability while securing virtually risk-free investments in portfolio companies with known, unfunded pension liability.” The pension fund says the decision limits recovery of withdrawal liability by multiemployer pension funds.

New England Teamsters argues that the 1st Circuit decision failed to follow the totality of the circumstances test outlined by the Supreme Court in Commissioner v. Culbertson (1949), which the fund says, “is the seminal case in determining whether a partnership exists.” The fund says the appellate court’s analysis under Luna v. Commissioner, a 1964 Tax Court case, is narrower. “By limiting its analysis to the ‘Luna factors,’ the decision ignores the facts that throw light on the ‘true intent’ of the parties, specifically the undisputed fact that all of the entities in question were controlled by the same two men,” the petition says. “As the sole members of the limited partner committees, [the two men] made all of the decisions (both before and after the purchase of SBI), while hiding behind the guise of an LLC.”

In addition, New England Teamsters says the 1st Circuit’s analysis is informed by a misstatement of the purpose of ERISA and the MPPAA. “It finds without justification that a principal purpose of the statute is ‘to encourage the private sector to invest in, or assume control of, struggling companies with pension plans.’ Citing this misstatement, it seeks authorization from Congress and the Pension Benefit Guaranty Corporation (PBGC) which reaches beyond what is provided in the current statute in order to hold private equity funds liable for withdrawal liability,” the petition says.

The pension fund argues that this is at odds with the purpose of the MPPAA acknowledged by the Supreme Court—to protect multiemployer plans from the financial burdens that result when one employer withdraws from a multiemployer plan without first funding its uncovered liabilities.

“In essence, it has created a judicial exemption to withdrawal liability that shields private equity firms,” the petition says.

The case is important as more private equity funds do acquisitions in industries where multiemployer plans are common, according to John Lowell, Atlanta-based actuary and partner with October Three Consulting LLC.

«