While collective investment trust (CIT) providers continue to focus their distribution efforts on defined contribution plans with $25 million or more in assets, providers have recently expressed a greater interest in the smaller plan market segment, according to a new report from Cerulli.
The December 2022 edition of The Cerulli Edge—U.S. Asset and Wealth Management Edition reveals that interest in the $5-million-to-$24-million plan asset segment is significantly greater this year (84%) than in 2021 (63%).
The recent down-market focus of CIT distribution trends is likely driving a decline in custom fee agreements, the report notes. While most asset managers allow for custom fee arrangements within their CIT products (87%), only 28% of their investors on average were in such an arrangement by year-end 2021. This figure represents an 11% drop from 2019, according to Cerulli’s data.
Moreover, CIT providers are extending custom fee arrangements to a smaller percentage (77%) of their 3(38) investment advisor clients this year compared to 85% in 2021. CIT providers may be more selective about to whom they extend custom fee arrangements, but efforts to distribute their products down-market to small- and mid-sized plans also is likely driving this trend, the report explains.
“Investment advisors and plan sponsors who manage smaller plans have less bargaining power than their larger counterparts, which historically have been the focus of CIT product distribution efforts,” notes Shawn O’Brien, Associate Director at Cerulli.
Partnerships
The increased focus that CIT providers are showing in their distribution efforts among smaller DC plan clients implies additional partnerships between CIT managers and B/D firms will likely become more commonplace in the near future since small- to mid-sized plans are typically serviced by B/D-based advisors. Accordingly, CIT providers should seek to forge relationships with B/D home-office investment teams to expand their presence among these plans, the report suggests.
“B/D home-office investment teams often are the ‘gatekeepers’ for DC plan investment selection,” says O’Brien. “The guidance, advice, and restrictions they implement ultimately dictate the fairly selective list of funds that are approved for advisor use in DC plans.”
However, the lack of commissions (12b-1 fees) in CITs could pose a challenge to the widespread vehicle use in the B/D-intermediated market, the report further observes. Cerulli recommends that asset managers engage B/D home-office research teams and retirement plan program managers to assess whether an opportunity for relationship pricing exists and, if so, whether that would help secure placement on their preferred funds list(s).
Performance Matters
To that end, retirement plans prefer low-fee investments, in part due to the threat of regulatory scrutiny and class-action lawsuits that have targeted plan fees in recent years. “This preference can be seen in the prevalence of passive investment strategies and lack of revenue-sharing agreements in these vehicles, though recently there has been an interesting twist in this litigation trend,” Cerulli observes.
The report explains that participants in multiple large DC plans in the past year have filed a class-action lawsuit against their plan sponsors, alleging that they had chosen to include BlackRock target-date funds on their plan investment menus due to giving more consideration to low fees rather than fund performance.
As such, Cerulli recommends that CIT providers be prepared to adapt their conversations with plan sponsors and investment fiduciaries regarding their products’ ability to “withstand scrutiny with this new litigation approach in mind.” Moreover, this trend could increase the challenge of placing CIT funds with relatively short performance histories into retirement plans, even if the same strategy being used has been successfully managed in a different vehicle for a longer period, the report further notes.
Periodic Review
Given the ongoing investment market volatility, as well as shifting dynamics among aggregator firms, Cerulli recommends that CIT providers periodically review their AUA monitoring policies to ensure the information that informed their initial fee negotiations continue to hold throughout the arrangement.
“This review is particularly relevant for custom pricing arrangements extended to plan advisors/consultants that have experienced a significant decrease in business or projected business,” the report advises. Establishing these processes could become more important if CIT providers decide to leverage custom fee arrangements in their efforts to expand into the small-plan market, Cerulli further emphasizes.
