Products November 1, 2023

Fidelity Launches CITs With Alternative Investment Exposure

Nation’s largest recordkeeper seeks to bring direct real estate investing to plan participants.

Reported by

Fidelity Investments announced on Wednesday 14 new collective investment trust investment vehicles that include 5% exposure to direct real estate—with the potential for other alternative assets in the future.

Fidelity’s asset management arm has launched the Freedom Plus Commingled Pool target-date series for eligible qualified retirement plans. The investment strategy is designed to leverage Fidelity’s TDF glide path approach with both liquid and illiquid alternative investment strategies, according to the firm.

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

The alternative portion will be put toward direct real estate investment, sitting alongside equities, bonds and other short-term strategies similar to Fidelity’s other Freedom TDF products popular in DC plans. The investment team will “continue to evaluate additional alternative asset classes for inclusion in the portfolios over time,” according to an emailed response from a spokesperson.

“Alternative asset classes in a multi-asset portfolio may provide potential benefits, including improved diversification and enhanced risk-adjusted returns,” Andrew Dierdorf, co-portfolio manager of Fidelity Freedom Plus CITs, said in a statement. “As interest in alternative investments is growing among plan sponsors and advisers, this offering builds upon Fidelity’s organizational commitment to providing customers with a range of investment choices, including options for clients interested in alternatives.”

In addition to Freedom Plus, Fidelity offers three other Freedom CITs: Freedom, Freedom Blend and Freedom Index, according to the spokesperson. As of September 30, Fidelity has more than 300 institutional clients representing about $120 billion in assets under management using Fidelity for target-date solutions, according to the firm.

In research released Wednesday, consultancy Cerulli Associates noted that CITs continue to take the place of mutual funds in retirement plans. The shift is being spurred by an increase in retirement plan advisories serving the midsize and smaller client markets recommending CITs, Cerulli wrote.

Meanwhile, an October white paper produced by the Defined Contribution Alternatives Association noted ways retirement plan advisers and sponsors can incorporate alternative assets into plans. The organization noted that, since regulators smoothed the way for alternatives to be used in DC plans in 2020, there has been an increase in their inclusion.

The October paper specifically addressed the ongoing concern of using “illiquid” assets in a defined contribution plan that go against participant “expectations of flexible, fast, daily access to their retirement savings.” DCALTA suggested a few ways to manage the illiquidity issue, including third-party options that can address liquidity and capital requirements.

Fidelity noted that its Freedom Plus CIT series will be marketed in a similar manner to its other target-date offerings: either directly to plan sponsors or plan consultants and advisers. The firm noted a benchmark for the CITs as the Fidelity Freedom Plus Compositive Index because “the weights and indices are representative of the strategic allocation in the portfolios.”

Fidelity cited its Plan Sponsor Attitudes Study in noting plan sponsor interest in leveraging CITs in retirement plans. The survey of 1,351 plan sponsors conducted in March found that in the past two years, 29% of respondents increased the number of CITs within their investment options. The overall percentage of plan sponsors offering CITs had a 10% annual growth rate from 2018 to 2023, according to the study.
Compliance November 1, 2023

Safeguarding Proposal Remains Unpopular in Investment Industry

The same criticisms of the proposal linger, but the SEC is continuing to push ahead.

Reported by

The re-opened comment period for the Securities and Exchange Commission’s safeguarding proposal closed on Monday. Industry opinion expressed in the comments remained much the same as it was during the original comment period that expired in May: The rule is too onerous and will hurt investors.

The safeguarding proposal would replace the old custody rule. Currently, advisers must keep assets with a qualified custodian if they have the right to obtain or control assets, including to draw from client assets to pay advisory fees. The custody rule applies to most securities besides registered funds.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The new proposal adds to these requirements. The first addition is requiring investment advisers to follow custody requirements if they have discretionary trading authority, even if they are not able to draw fees from the assets.

This element has been widely criticized as redefining custody and subsequently increasing cost for clients who want discretionary trading. The American Securities Association, for example, wrote that “discretion, generally, does not equal custody” and said investors “can benefit from discretionary investment management services. However, the Proposal generally increases the cost of providing discretionary advice.”

All Assets

Second, the proposal as it currently stands would include all assets under the custody rule, not just securities. That would include all manner of real assets and commodities, including real estate, art and precious metals.

This element has drawn criticism from Congressional Republicans, who noted that this encroaches on the authority of the Commodity Futures Trading Commission and that some assets cannot be easily custodied or audited. Further, some assets such as real estate are difficult to misappropriate.

Since the proposal would apply to all assets, it would also apply to cash. The most common objection to the proposal from investment industry groups is that it would require advisers to obtain assurances from custodians that cash will be kept segregated. Since many of the largest custodians are commercial banks, which lend cash deposits, these advisers would either have to find another custodian or pay much higher fees to those custodians.

The Insured Retirement Institute, the Investment Company Institute and many others objected to the proposal on that ground. HSBC noted this as well in a comment letter and added that it would make it particularly difficult to keep assets in foreign institutions, which would likewise be subject to the rule if interacting with registered advisers based in the U.S.

Audit Expansion

In expanding custody requirements to all assets, the safeguarding rule also expands the surprise audit requirement to all assets. Currently, advisers are subject to a surprise audit of custodied assets once per year to verify their existence and ownership, but only if those assets are part of a pooled investment vehicle.

Jay Gould, a special counsel with Baker Botts, says, “Advisers with custody or the ability to maintain and control client assets find portions of the rule burdensome and likely to increase costs, particularly expanding the audit provision to cover any other entity, in addition to pooled vehicles.”

Gould adds that “auditor oversight is something that the Commission believes is a significant investor protection feature. I would not expect the Staff to recommend that the Commission materially revise this requirement when they adopt the rule amendments.”

The SEC has not yet set a timetable to finalize the rule.

«