According to research from Cerulli Associates, adoption of institutional vehicles among defined contribution (DC) plans is slow. “The current investment vehicle landscape is dominated by mutual funds, which account for 53.2% of 401(k) assets,” noted Kevin Chisholm, senior analyst at Cerulli. “Plan size is the key factor in determining whether a defined contribution plan uses institutional investment vehicles.”
The research found plans with less than $250 million in assets will likely continue to use mutual funds as their primary investment vehicles, and plans with between $250 million and $1 billion assets will continue to use mutual funds as primary vehicles, but Chisholm says Cerulli expects the use of institutional vehicles to grow, especially among plans with close to $1 billion in assets. Plans with more than $1 billion in assets are using institutional vehicles and Cerulli expects the number of institutional vehicles used to increase.”
Overall, Cerulli finds that the increase in use of institutional vehicles is slow for several reasons. Managers typically select the strategy first, and then choose the investment vehicles that best fit the plan’s structure. There are also few actively managed collective trust funds (CTFs) available, which will affect potential growth of institutional vehicle use.
“Concerns around fiduciary responsibility and the plan participant communication process lead to a slow decisionmaking process, and ultimately contribute to a lack of action,” Chisholm says. “We’ve found this to be consistent with changes to DC plans in general because companies have little incentive to make changes to their DC plan.”
Many factors contribute to the decision to include institutional investments within DC plans. Understanding these factors is integral for asset managers considering the addition of institutional investments.
This research is from “The Cerulli Edge – Retirement Edition, 4Q 2012 Issue” and is available for purchase by contacting CAmarketing@cerulli.com. The report provides a review of current product development trends in the industry, including an in-depth look at investment vehicles used in defined contribution plans.