CITs in DC Plans Quickly Becoming the Norm

Many asset managers describe 2017 as a “tipping point” for collective investment trust flows from DC plans, according to a new analysis from Cerulli Associates.

Cerulli’s latest report, “U.S. Defined Contribution Distribution 2017: Re-Evaluating the Use of CITs in DC Plans,” suggests that even “perennial cynics” are beginning to see the distribution opportunity collective investment trusts (CITs) present in the U.S. defined contribution (DC) plan market.

According to Jessica Sclafani, associate director at Cerulli, asset managers that currently do not offer collective trusts or offer a limited number of investment strategies in a collective trust vehicle are “sharpening their pencils and evaluating where a collective trust vehicle may create an opportunity to offer more competitive pricing.”

As the CIT product set expands, it is important for retirement plan fiduciaries to follow the market developments to ensure their participants are presented with cost-efficient and competitive investments. In fact, according to Sclafani, in today’s evolving marketplace, DC plan mandates “can be won or lost by the difference of a few basis points.”

“Mutual funds consistently represent greater than half of total 401(k) plan assets,” she notes. “The next-largest investment vehicle by 401(k) plan assets is CITs, which hold almost one-fifth of total 401(k) plan assets at this point. Together, mutual funds and CITS hold close to three-quarters of 401(k) plan assets, making them the most widely used investment vehicles for 401(k) plans.”

Given the momentum that continues to build behind CIT investment vehicles, Cerulli believes there is room for CITs to expand from their current share of the 401(k) plan market by taking share from mutual funds. In a survey of 401(k) plan sponsors cited by the reporting, nearly one in five indicate that they anticipate switching the vehicle of at least one investment option from a mutual fund to a CIT in the near future.

Beyond the subject of CITs, Cerulli reports that recordkeepers widely identify “reducing plan administration costs” and “maximizing participant savings” as the top two priorities for defined contribution plan sponsors. Despite the broader retirement industry’s focus on retirement income, none of the recordkeepers surveyed selected “providing in-plan retirement income solutions” as a plan sponsor priority.

“This suggests that the industry may be out of touch with the current realities plan sponsors face. It also intimates that plan sponsors may not fully understand how their organization may be exposed should their employees be unable to retire,” Sclafani suggests. “The increasingly complex regulatory environment clearly continues to weigh on plan sponsors with nearly one-third of recordkeepers identifying ‘minimizing fiduciary risk’ as a top priority for plan sponsors.”

Plan advisers and recordkeepers can help alleviate this pain point among plan sponsors through ongoing education as to what it means to be a fiduciary, Cerulli says.

“This is a concept that Cerulli believes many DC industry stakeholders, from advisers to plan sponsors, still do not thoroughly understand,” Sclafani concludes. “This is reflected in some of the new products that have emerged post-Conflict of Interest Rule that sell fiduciary protection.”

Information on obtaining Cerulli research is available here