CIT Expertise Puts Advisers in the Driver’s Seat

Knowledge about and connections to the collective investment trust marketplace can be a key selling point for retirement plan advisers in 2020 and beyond—especially when serving small and mid-sized clients.

For decades, mutual funds have been the typical investment vehicle deployed by defined contribution (DC) retirement plans, but the virtues of collective investment trusts, or “CITs,” have shifted that dynamic.

According to Robb Muse, the director of SEI’s internal trust company who oversees the firm’s CIT program, the use of CITs has grown tremendously over the past decade and can only be expected to grow in the future.

“Several trends back this assumption—it is the fee pressures, the fiduciary lawsuits and more,” he says. “DC retirement plan sponsors are taking their fiduciary responsibilities ever more seriously, and often they feel that CITs are a great fit for best-interest service.”

In Muse’s experience, the topic of collective investment trusts “has been pretty front and center” over the past few years for the retirement planning market. This is a reflection of plan sponsors’ razor-sharp focus on fees and transparency, he explains, but the CIT growth is also being fueled by competition among asset managers.

“The asset managers know the main quivers they have at the ready are performance and fees, and their product teams are leaning into CITs as a result, given that they are often less expensive than mutual funds,” Muse says. “And the influence of outsourced chief investment officers [OCIOs] and discretionary third-party investment managers is meaningful, too. They are helping to drive this trend.”

Jessica Sclafani, a director and defined contribution strategist for the investment solutions group at MFS Investment Management, also foresees a growing dominance of CITs in the DC plan marketplace.

“We strongly believe that more transparent investment vehicles, in terms of both fees and reporting, are going to be the future in the DC market,” Sclafani says. “We expect to see mutual funds and CITs with zero revenue-sharing fee structures continue to gather greater DC plan assets every year. It’s no surprise, given the attitude about fees that exists in our space today.”

She notes that, as an active manager that serves the DC plan space, MFS is committed to the most efficient delivery of its value-add, which is alpha.

“Again, that means that mutual funds and CITs with zero revenue sharing are so important,” Sclafani says. “I like to emphasize that the future is not just about CITs. There is a tendency out there to talk about CITs as perhaps the single cheapest and best investment vehicle for DC plans, and that’s not actually the case. They often can be the most efficiently priced investment vehicle, but not always, that’s not a rule.”

Muse echoes that assessment, pointing to the emergence of mutual funds with “clean” share classes or share classes specifically designed for retirement plans and institutional investors.  

“When plans are working with their advisers and asset managers, first comes the discussion of needs, goals, time frames and cost expectations,” he says. “Then comes the assessment of which managers they want to use to fit those needs. The final decision about the vehicle is only made after the manager and strategy are settled upon. Then it becomes appropriate to ask what the best vehicle is. Is it the mutual fund, the separate account or the CIT?”

As Muse and Sclafani note, these days, CITs are getting selected very often in this competitive setting, and that says a lot about the benefits of the approach.

“You see a lot of lawsuits out there make the claim that not offering CITs itself means that sponsors aren’t fulfilling their fiduciary duty,” Sclafani notes. “In reality, it’s a much more subtle conversation. You have to look at how your mutual funds are priced, how your CITs are built. It’s not just saying that CITs are always better. This is where advisers and consultants can really bring their expertise to the fore.”

In his experience, Muse says, market-leading advisers are already working hand-in-hand with fund managers to deploy CITs in innovative ways.

“It’s not uncommon for newly launching CITs these days to have five or six different share classes,” he explains. “These could each be solving for a variety of challenges. We could have a share class to attract large investors, a founder share class to get an investor to launch a fund, a general OCIO class and then a very specific OCIO class for one or two big adviser partners. It is really dynamic and advisers should learn how to get involved.”

In Sclafani’s view, the largest opportunities for CIT asset growth in the DC market are in the mid-sized and small-sized plan segment, which are predominantly adviser intermediated.

“The more advisers become comfortable with CITs, the more prevalent they will become, and that dynamic will reinforce itself,” she predicts. “When you think about CITs and how they have gathered momentum in recent years compared to their long-term history, a lot of that has to do with the adviser and consultant community and their focus on fees. It is also due to the now-defunct fiduciary rule inspiring the whole marketplace to raise its awareness and focus on fees.”

What is the next step for CITs? Sclafani says it will be asking how plan sponsors and their advisers can work together to create their own white-labeled investment products using CITs as the low-cost building blocks.

“Leading advisers are pleased about this, I would say, because the CIT expertise is a clear way for them to stand out,” she says. “It should help advisers that CITs today are more broadly available on many recordkeeping platforms. Even five years ago, the recordkeeper community may have been less willing to work with plan sponsors to get CITs on their platform. Now, there is a growing ease of business that hadn’t formally existed. Recordkeepers today will proactively ask us about CIT offerings, so it’s really dynamic.”