The death of mutual funds in 401(k) plans is greatly exaggerated, especially in smaller and mid-sized plans, according to a survey (free registration required) conducted by Cerulli with help from the PSCA and data from the DOL. Though collective investment trusts (CITs) are cheaper and offer more flexibility, mutual funds dominate plans with less than $250 million — followed by closely bunched separately managed accounts, CITs and insurance products. In larger plans it’s a much closer race, although mutual funds products are still the most popular investment vehicle. The growth of CITs in that market segment is likely, according to Cerulli.
CITs have been a buzz in the advisor-sold DC market for almost 10 years. One company, First Mercantile (which was purchased by MassMutual), focused exclusively on them for smaller plans. But as plans get smaller, the basis point reduction translates into far fewer dollars. Also, smaller plans are less price-sensitive, and there are some marketing restrictions as well. Like DC plans, most mutual funds are sold, not bought, so the results might be different if there were armies of CIT wholesalers.
Interestingly, plans with more than $1 billion like mutual funds, but institutional classes and many larger plans pick the manager first, not the wrapper. What a novel idea – picking an investment strictly on the basis of the manager!
