Collective investment trusts could present opportunities for greater use in defined contribution plans.
According to research from Cerulli, while the notion isn't new, greater use of CITs during 2017 implies that asset managers might want to take another look at the idea.
In fact, Jessica Sclafani, associate director at Cerulli, says in the report that "Cerulli finds that even perennial cynics are beginning to see the distribution opportunity collective trusts present in the DC market. Many asset managers we spoke with describe 2017 as a 'tipping point' for CIT flows from DC plans."
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CITs are important from a product management and distribution point of view, the report says, because they could help boost an asset manager's chances of winning DC plan mandates because of the opportunity they offer to cut pricing.
As a result, asset managers not already using them should run the numbers again.
While CITs come in second to mutual funds as a percentage of 401(k) assets—funds account for more than half—it's possible that CITs can increase their concentration in 401(k)s by taking market share away from mutual funds.
At present they account for just under a fifth of 401(k) assets.
But since the top two priorities of DC plan sponsors are reducing plan administration costs (40 percent) and maximizing participant savings (36 percent), the advantage offered by CITs could prove a deciding factor.
Nearly a third of recordkeepers identify "minimizing fiduciary risk" as a top priority for plan sponsors, yet despite the broader retirement industry's focus on retirement income, none of the survey participants selected "providing in-plan retirement income solutions" as a plan sponsor priority.
The report says that this could indicate that the industry is out of touch with the demands on plan sponsors—and also that plan sponsors may not fully understand how their organization may be exposed should their employees be unable to retire.
It's not enough just to offer passive investment strategies, the report says, but pressure to keep investment management fees low is another part of the problem.
Says the report, "Choosing passive is a clear and simple way to reduce fees; however, choosing the fund with the cheapest expense ratio does not equate to 'checking the fiduciary box,' as some plan fiduciaries mistakenly believe."
Instead, "Cerulli recommends that those asset managers that currently do not offer collective trusts or offer a limited number of investment strategies in a collective trust vehicle go through the exercise of 'sharpening their pencils' and evaluate where a collective trust vehicle may create an opportunity to offer more competitive pricing," Sclafani writes. "In today's highly competitive marketplace, DC plan mandates can be won or lost by the difference of a few basis points."
She adds, "Cerulli believes there is room for CITs to expand from their current share of the 401(k) plan market by taking share from mutual funds. In a survey of 401(k) plan sponsors, nearly one in five indicate that they anticipate switching the vehicle of at least one investment option from a mutual fund to a CIT."
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