Collective investment trusts (CITs) have become an important tool in the defined contribution (DC) plan market, in large part because of their low cost and customizability. This alignment has led to a significant increase in the development and use of CITs over the past several years, and new developments could further increase the demand for CITs.
A Changing Intermediary Landscape
CIT industry assets more than tripled in the 10 years ending in 2018, research shows, climbing to $3.1 trillion by year-end.
Although CITs are a fraction of the total assets in DC plans compared to mutual funds, with certain ongoing changes in the broader intermediary landscape, they appear to be poised for continued growth.
CITs are still most prevalent in the large end of the DC market, where national consultants—who, as of 2019, advise nearly $3.5 trillion of the $8 trillion in DC assets—are increasingly pushing large plan sponsors toward the vehicle. Such national consultants include Mercer, Aon, Willis Towers Watson, etc.
In this market segment, the percentage of plan sponsors using CITs has increased from 44% in 2011 to 75% in 2019, as shown by the Callan Defined Contribution Trends Survey 2020. Having found success and growth in the large end, these consultants have started applying their investment expertise in the smaller-plan market. Some national consultants are even starting to work with plans as small as $50 million in assets, bringing institutional investment solutions such as CITs that were previously only available to large plans.
As consultants shift to the mid-market, they play against a set of rapidly growing distribution powerhouses in the form of the aggregator firms, which can also use economies of scale to deliver more sophisticated investment solutions to smaller plan clients. Over the past five or 10 years, this group of roughly 15 leading benefits providers and registered investment adviser (RIA) firms has built specialty retirement practices and, through continued acquisitions, has grown to advise more than $1.4 trillion in DC retirement assets. While aggregator firms gain market share in the mid-market, they are also moving upstream and beginning to serve large- and even mega-plan sponsors.
A Shift in Target-Date Offerings
Beyond these developments, a set of overarching industry trends also supports a case for continued CIT growth. Sponsors and participants are demanding more personalized retirement solutions that account for a participant’s broad financial picture. To meet these demands, intermediaries are creating custom investment products and managed account offerings tailored to the sponsor’s and participant’s needs.
Since the Pension Protection Act of 2006 (PPA), off-the-shelf target-date funds (TDFs) have dominated the DC space. However, driven by fee pressure from plan sponsors and increased demand for customization, asset managers are positioning cheaper—and often identical—CIT options alongside their standard mutual fund offerings and seeing significant uptake.
In addition to “cost,” the target-date CIT trend is also driven by the ability to tailor the investment to a plan or intermediary firm. With the growing trend of custom investments in the target-date slot, CITs are poised to be the vehicle of choice.
A Bright Future
While the growth of CIT assets in DC plans is already significant, several new developments in the rapidly changing DC landscape are laying the groundwork for additional future growth. These developments include, for example, the rise of open multiple employer plans (MEPs).
Despite the lowering and even elimination of minimum investment requirements helping CITs move more into the mainstream, the CIT presence in the under $10 million market is still limited. With the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, however, non-affiliated employers can now join forces to offer a single plan, promising a much broader adoption of MEPs in the form of pooled employer plans (PEPs).
Another broad trend to consider is the growing focus on retirement income. The SECURE Act includes a provision to provide plan sponsors that adopt annuity products with long-sought safe harbor protections. Much like with open MEPs, the industry is seeking additional clarification about several gray areas. Despite these open questions, leading insurance firms are looking to build new income solutions for retirement plans.
Unlike 401(k) plans, 403(b) plans are at this point prohibited from using CITs, with one exception being church plans. Many investment firms and industry associations have been lobbying to allow CITs in all 403(b) plans. There are two important reasons recordkeepers are pushing to include CITs in 403(b) plans. The first is cost savings. The second is consistency—meaning that schools, hospitals and other nonprofits should have access to the same investment vehicles as private sector employees.
A Time for CITs to Shine
Driven largely by an industry-wide focus on lower fees and increased flexibility, CITs have grown significantly in the past decade. With these secular trends continuing in the DC market, we expect CITs to grow at a faster pace going forward. To take advantage of this demand, asset managers should create a diverse set of products, vehicles and solutions, including an array of low-cost CITs focused on personalization and custom solutions.
Editor’s note: Robb Muse is an executive vice president at SEI Trust Company.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.