Data & Research August 3, 2021

Use of CITs in 401(k)s Continues Growth

Collective investment trusts dominate the large plan market, particularly within target-date funds, data shows.

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The use of collective investment trusts (CITs) has surpassed the use of mutual funds in 401(k) plans with more than $1 billion in assets, according to data from BrightScope, part of ISS Market Intelligence*.

CITs more strongly dominate the large plan market, particularly within target-date funds (TDFs), BrightScope says. According to the data, in 2009, the target-date market share of CITs in these mega plans was 51%, while the target-date market share of mutual funds was 48%. The market share of CITs has grown steadily since then, to reach 86% in 2018, compared with a 13% market share for mutual funds.

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The BrightScope/Investment Company Institute (ICI) “Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2018” report says mutual funds were the most common investment vehicle in 401(k) plans, holding 43% of large private-sector 401(k) plan assets in the BrightScope database in 2018. However, CITs were close behind, holding 33% of assets. “Mutual funds accounted for at least half of the assets in all but the very largest plans, where a larger share of assets was held in CITs,” the report says. CITs held about 6% of assets in 401(k) plans with $100 million or less in plan assets, compared with 49% in plans with more than $1 billion.

The allure of CITs is their lower cost compared with mutual funds. However, experts point out that some plan sponsors have concerns about CITs that make them skeptical about using the investment vehicles. CITs are less transparent than are other options—they have no ticker symbols, are not regulated by the Securities and Exchange Commission (SEC), are not subject to the Investment Company Act of 1940 (’40 Act) fund rules and participants are less familiar with them than mutual funds.

However, the threat of lawsuits over plan investment fees is also driving more plan sponsors to consider CITs. The different types of lawsuits can inform plan sponsors’ due diligence efforts when making an investment selection. Some lawsuits accuse plan fiduciaries of violating fiduciary duties when reviewing funds and fees because they did not consider available CITs as alternatives to the mutual funds in the plan. Other lawsuits have challenged the selection of untested CITs or the use of CITs with higher expense ratios than other CITs.

The popularity of CITs suggests they are worth considering, but as with any investment vehicle, plan sponsors must always follow a prudent process.

*Editor’s note: PLANADVISER is owned by Institutional Shareholder Services (ISS).

Data & Research August 2, 2021

The Number of Excessive Fee Lawsuits Grew in 2021

Plan sponsors also brought D&I efforts to retirement plans and lawmakers continued to introduce retirement plan legislation, according to Janus Henderson Investors’ DC trends webinar.

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A recent Janus Henderson Investors webinar reviewed key defined contribution (DC) trends and developments in the retirement industry for 2021, pinpointing diversity and inclusion (D&I), retirement confidence and environmental, social and governance (ESG) investing as top highlights.

The webinar, hosted by Matthew Sommer, head of defined contribution and wealth advisor services at Janus Henderson Investors, noted that a 2020 survey of DC plan sponsors by Willis Towers Watson found close to two-thirds of respondents extended their organizations D&I efforts to their retirement plans. The study, “Moving the Needle on Defined Contribution Plans” offered four suggestions for plan sponsors to consider, including targeting specific cohorts; extending D&I to the committee composition; incorporating culture and diversity when assessing asset managers, and boosting the financial wellbeing of plan participants.

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On the topic of retirement confidence, Sommer highlighted a 2021 Employee Benefit Research Institute (EBRI) Retirement Confidence Survey that found 80% of retirees say they are confident in their ability to live comfortably throughout retirement, up from 76% from March 2020. According to the survey, despite facing challenges from the coronavirus pandemic in 2020, retiree lifestyle and expenses remained largely unchanged.

Financial priorities changed among different working demographics as well, according to the EBRI study. Compared to white respondents, African American and Hispanic workers said they were more likely to consider debt a major problem and were more likely to say that a connection or commonality between them and an adviser is important. Hispanic respondents, regardless of income, were more likely to say helping friends and family in the current climate is more important to them than saving for retirement.

The webinar also examined popular legislative proposals that would impact the retirement industry and its participants. Among the bills reviewed were the Financial Factors in Selecting Retirement Plan Investments Act, introduced by Senators Tina Smith, D-Michigan, Patty Murry, D-Washington and Representative Suzan DelBene,D-Washington, and the Securing a Strong Retirement Act of 2021, also known as SECURE 2.0.

The Financial Factors in Selecting Retirement Plan Investments Act would ease the path to incorporate ESG factors into investment decisions, said Sommer, provided plans consider such investments in a prudent manner consistent with their fiduciary duties. The proposed legislation would also repeal the Department of Labor (DOL) rule finalized under the Trump Administration, as well as “limit future regulatory actions that impose unfair regulatory burdens in an effort to discourage ESG investing by ERISA [Employee Retirement Income Security Act] plans.”

Other legislative actions, including new state and city mandated automatic individual retirement account (IRA) programs, were discussed throughout the webinar. Maine, Delaware, and New York City have all enacted legislation that would require businesses of certain sizes and without an employer-sponsored retirement program to offer auto-IRAs. 

Sommer finished the panel by reviewing key developments in the retirement industry legal space. He noted how U.S. attorneys have asked the Supreme Court to review an excessive fee case involving Northwestern University, which the 7th U.S. Circuit of Appeals dismissed last year.

Sommer also noted that WakeMed Health and Hospital in Raleigh, North Carolina, agreed to settle a fiduciary breach case that included a $975,000 settlement and required the plan to conduct a request for proposal (RFP). Terms in a Columbia University settlement were also announced, which included a $13 million-dollar settlement, mandatory annual fiduciary training, rebating all revenue sharing and conducting an RFP.

A number of excessive fee lawsuits have targeted 403(b) plans, including those against Bronson Healthcare Group, Wake Forest University Baptist Medical Center and the University of Tampa.

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