The Markets February 14, 2023

Collective Trusts Expected to Top Mutual Funds as Primary Target-Date Vehicles in 2023

Most target-date providers saw losses in 2022, with gains coming mostly from CIT-based funds. 

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Collective trusts are projected to top mutual funds as the primary target-date vehicles this year, according to the latest analysis from Sway Research.

The number of lower-cost collective investment trusts, known as CITs, in target-date funds has surged past those that are mutual-fund based, Sway found in a report released Monday. As CIT-based solutions have produced the most asset gains in non-custom TDF portfolios, providers are increasingly placing assets in collective trusts, according to the Newton, New Hampshire-based firm run by founder and principal Chris Brown.

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“Few target-date providers were spared losses for the year, with most experiencing a double-digit drop in assets,” the Sway report ‘The State of the Target-Date Market: 2023” stated. “A majority of the series that managed to produce asset gains were CIT-based, as the utilization of lower-cost collective investment trusts in Target-Date construction continues to surge.”

Assets in non-custom TDF portfolios fell from $3.25 trillion at the end of 2021 to $2.83 trillion at the end of 2022, marking a 13% drop, according to Sway’s proprietary database of 130 TDF solutions, spread across more than 6,000 mutual fund share classes and CITs. Most series that produced asset gains were CIT-based.

Meanwhile, CITs in TDFs continue to surge, while assets in mutual fund-based TDFs are still in decline. Over the last five years, assets in CIT-based solutions grew an average of 15% annually compared to 6% for those based in mutual funds, according to Sway. For each new mutual fund series, there were seven new CIT target-date series launched in 2022. 

At Vanguard, according to Sway tracking, CIT TDFs topped mutual fund-driven funds by $534 billion to $522 billion for the first time since tracking began in 2016. More than half of T. Rowe Price and JPMorgan’s target-date assets are held in CITs. Almost a quarter of Fidelity’s TDF assets under management are now held in collective trusts.

Assets in mutual fund-based TDFs in 2022 fell below the level tracked in both 2021 and 2020. At the end of 2017, the mix of MF to CIT was 63% to 37%. As 2023 started, the split was 52% to 48%. Sway’s analysts expect that CITs will surpass mutual fund-based TDFs this year. Currently there are 79 CIT products on the market, compared to 51 mutual-fund products.

In Practice February 13, 2023

Empower Joins Auto Portability Consortium

The Retirement Clearinghouse-led consortium now includes the country’s four largest recordkeepers.

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Empower Retirement, the country’s second-largest 401(k) recordkeeper by assets, will join Retirement Clearinghouse LLC’s consortium of recordkeepers set up to automatically move retirement plan savings of $5,000 or less to a worker’s new provider when they change jobs.

Empower is the fourth recordkeeper to sign on with Portability Services Network LLC, an entity that is majority owned by Retirement Clearinghouse, and uses its technology to automatically locate a participant’s active 401(k), 401(a), 403(b) or 457 account in their current employer’s plan and transfer accounts under $5,000 into an active account.

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The clearinghouse is designed to reduce cash-outs, in which employees take an immediate tax hit by cashing out their plans instead of going through the rollover process. This retirement plan “leakage” tends to happen disproportionality among lower-income and minority workers, and results in tens of billions of dollars leaving retirement plans, according to industry-backed research firm EBRI.

“Advancing auto-portability adoption across the retirement system provides workers with the best chance to harness the power of all the assets they have earned through their workplace savings plans,” Empower President and CEO Edmund F. Murphy III said in a statement on Monday.

Empower joins the consortium announced in October 2022 alongside the country’s three other largest recordkeepers by assets: Fidelity Investment, Vanguard and Alight Solutions. The Greenwood Village, Colorado-based Empower announced that it will make the service live for plan sponsor clients in the first quarter of 2025.

The consortium is the brainchild of business owner and entrepreneur Robert L. Johnson, whose Retirement Clearinghouse has been working for years with recordkeepers and policymakers to get both industry participation and regulatory approval for a national auto-portability network. With the passage of the SECURE 2.0 Act of 2022, a plan provider can now transfer a participant’s retirement savings from a previous employer to a new one, unless the participant says otherwise.

PSN is majority-owned by Retirement Clearinghouse, with the recordkeepers providing the other ownership stakes. There are still two open spots for recordkeepers to join the venture, according to the announcement.  The Retirement Clearinghouse and the recordkeeper owners will govern the network as an “industry utility” and allow all recordkeepers to connect to the network, though the providers will not receive any compensation for joining.

The system of automatic transfer between retirement plans was devised in part to mimic auto-enrollment, which has shown to be extremely effective in getting people to save within workplace retirement plans, according to Spencer Williams, who was brought on by Johnson to run the Retirement Clearinghouse and has been working closely with him on the consortium.

“Retirement Clearinghouse brings all of the technology, the intellectual property, the know-how,” says Williams, who is president and CEO of Retirement Clearinghouse. The recordkeepers bring “that customer base in aggregate—the critical mass.”

Although the recordkeepers compete amongst themselves, Williams says, they are also focused on the mission to preserve retirement savings for minorities, women and low-income earners. There is also, he emphasizes, a business case for the consortium and auto-portability. One advantage is that servicing these smaller, inactive accounts carries an administrative cost. Another is the longer-term impact of cash-outs to the retirement business.

“When we stop leakage, we get more dollars in the system, and we get better customers in the system,” Williams says. “Instead of letting the $2,500 account disappear, that $2,500 becomes $5,000 in a retirement plan, and we’ve not only changed behavior from a savings mentality, but we’ve created better customers for the whole system.”

Retirement plan advisers will also have a key role to play in making auto-portability a reality across the industry, Williams says.

“If you’re advising plans, tell the plan to adopt auto-portability,” he says. “It’s not a complicated thing, but it will help speed up adoption.”

With the addition of Empower, the consortium will represent about 60 million participants and more than $5 trillion in assets, based on data published by PLANSPONSOR, a sister publication of PLANADVISER. The Retirement Clearinghouse currently works with more than 34,000 retirement plans and has guided 1.8 million plan participants with more than $28 billion in retirement savings, according to the Charlotte, North Carolina-based firm.

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