ICI: Rise of CITs Adds Pressure to Outdated Fintech

The rapid rise of collective investment trusts, a once-niche investment vehicle now central to many retirement portfolios, is exposing cracks in the financial industry’s operational backbone, according to a new report from the Investment Company Institute.

As more defined contribution plan sponsors and other institutional investors turn to these lower-cost, flexible alternatives to mutual funds, the systems that support them—often reliant on manual processes and outdated infrastructure—are struggling to keep pace.

CITs represented 54% of total target-date assets at the end of 2025, outpacing mutual funds, according to Morningstar’s “2026 Target-Date Fund Landscape.” The ICI report argued that as demand for CITs has surged, particularly among large 401(k) plans, operational frameworks underpinning them have not evolved at the same speed.

“Many operational processes rely on legacy workflows and manual coordination,” the report noted, describing systems originally built for a far smaller and less complex market.

A Quiet Shift in Retirement Investing

Over the past decade, CITs have steadily gained ground in retirement plans, appealing to sponsors seeking lower fees and greater customization. According to the report, CITs comprised 34% of assets inside large 401(k) plans, defined as plans with at least 100 participants.

Unlike mutual funds, CITs are not registered with the Securities and Exchange Commission; do not have ticker symbols; and do not trade on exchanges, allowing them to operate with fewer regulatory constraints and often at lower cost. They are regulated by banking authorities. Their flexibility has come with trade-offs, particularly in how they are administered, ICI reported.

Industry participants say the fragmented nature of CIT operations—spread across trustees, recordkeepers and intermediaries—has made scaling difficult without significant technological upgrades. The ICI report identified several points in the CIT life cycle at which technologies similar to those used by the mutual fund industry could remove manual processes from onboarding; product management and distribution; new account creation; trading and settlement; pricing; and daily reconciliation.

Those hurdles could be further complicated by the INVEST [Incentivizing New Ventures and Economic Strength Through Capital Formation] Act, passed by the House of Representatives in December 2025, which includes allowing CITs in 403(b) plans. The legislation is currently with the Senate and was referred to the Senate Committee on Banking, Housing, and Urban Affairs.

According to Beth Halberstadt, Aon’s U.S. defined contribution investments leader, the legislation would bring investment vehicle parity to 401(k) and 403(b) plans and allow employers that offer both types of plans the ability to offer the same investment options in both.

But ICI warned that bringing the popular pooled investment vehicles into 403(b) plans, which serve 10 million Americans with $1.5 trillion in assets, would heighten the need for investments in operational technology to ensure efficiency and reliability.

Automation as the Next Frontier

To address these challenges, the report called for a shift toward automation, urging firms to adopt systems that can handle higher volumes with less manual intervention. It pointed to the mutual fund industry, in which standardized and automated processes have long supported large-scale operations, as a model.

The goal, the report suggested, is not simply efficiency, but resilience—ensuring that CITs can handle future growth without increasing operational risk.

The ICI report concluded that “The case for automation is clear, but adoption requires industry coordination. Providers, intermediaries, trustees, and regulators should align around:

• Standardizing participation agreements to support NSCC automation;
• Expanding intermediary adoption of Omni/SERV reporting;
• Building shared best practices for validating plan eligibility;
• Educating auditors and plan sponsors on the role of automation in enhancing fiduciary oversight.”