Why collective investment trusts now account for a quarter of the 401(k) market
Cerulli says shift from mutual funds to CITs is at a tipping point. Here's why.
Plan sponsors are moving 401(k) assets from traditional mutual funds to collective investment trusts at a record clip, according to analysis by Cerulli Associates.
Assets in CITs now account for a quarter of the $5.5 trillion 401(k) market. Historically, CITs have represented about 20 percent of the 401(k) market.
The considerable gain in market share has been paced by the adoption of target-date funds in CIT form, as more sponsors are moving from traditional mutual funds to CITs in an attempt to bring investment management fees down.
Between 2015 and 2017, target-date CIT assets increased by almost 85 percent. Meanwhile, assets in traditional mutual fund TDFs increased by 45 percent in the same time, according to research published in the third quarter edition of The Cerulli Edge—U.S. Retirement Edition.
Defined contribution market analysts have called the current movement from traditional mutual funds to CITs for years, as plan sponsors came under increasing regulatory, legal, and market pressures to bring participants’ cost to invest in a 401(k) down.
CIT investments are available to investors through qualified retirement plans, and not to the retail market. They are not regulated by the Securities and Exchange Commission, but rather by state banking regulators or the Office of the Comptroller of Currency.
Because they are not offered to the retail market, CITs bear lower operational costs by not advertising to retail investors.
That also translates to fewer investment prospectuses that have to be disseminated, another way CITs shed overhead costs to bring management fees down.
As sponsors have driven the demand for lower management fees, more traditional fund companies have rolled out CIT options. Traditionally, minimum investment requirements limited CIT adoption mostly to the large plan market. But in recent years, more trust managers have lowered or eliminated minimum investment requirements, opening up new opportunities for sponsors of mid-sized and even small plans.
Cerulli’s survey of target-date managers shows that 70 percent now offer a CIT version of target-date mutual funds, with 26 percent of managers not requiring a minimum asset investment.
When minimum investments are required by asset managers, the limits range from $1 million in assets to $250 million. Some managers base the minimum on total plan assets; others on target-date assets in a plan, Cerulli says.
Nine of the largest CIT providers have rolled out a trust target-date line. Vanguard’s CIT target-date series is the largest, with $241 billion in assets, followed by BlackRock’s series, which held nearly $145 billion by the end of 2017.
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