Asset growth of collective investment trusts (CIT) continues to chip away at mutual funds’ dominance, as defined contribution (DC) plan sponsors and intermediaries value the cost advantages of the vehicle, according to a new report from Cerulli Associates.
In the latest issue of The Cerulli Edge—U.S. Monthly Product Trends, which analyzes product trends as of September 2023, the firm reports that, even though CIT assets under management (AUM) ($4.6 trillion) trails that of mutual funds ($16.3 trillion), the vehicle’s asset growth has outpaced mutual funds in each year since 2018.
Within the 401(k) space, which accounts for nearly all corporate DC plan assets, CIT market share has been increasing at the expense of the mutual fund. Consider that as of year-end 2019, the CIT wrapper held 30.1% of total 401(k) assets, compared to 48.2% for mutual funds, but as of year-end 2021 (the most recent Cerulli data), the CIT’s allocation had risen to 32.8%, while mutual funds have fallen to 47.1%.
Mind you, Cerulli’s 2022 year-end CIT sizing reveals that total assets fell from $5.5 trillion at year-end 2021, but this was in line with broader global equity market declines during the year. Despite the dip, CIT assets still are up more than 50% since year-end 2018, when they totaled just more than $3 trillion, the report notes.
According to Cerulli, the shift toward CITs has been propelled by large DC plan sponsors and their intermediaries that have the “scale, sophistication, and leverage” to take advantage of the lower-cost CITs. In fact, cost has been a major driver, with CIT share classes often cheaper than the least expensive mutual fund share class (e.g., R6 share).
In turn, asset managers have followed up on increased demand by boosting the supply of CITs, the report further notes. A recent survey of product executives revealed that 63% of those launching CITs report being focused on replicating existing strategies, while another 30% are developing new strategies specifically for CITs. What’s more, nearly all of them indicate they are replicating existing strategies in CITs because of requests from plan advisors and consultants. Another 83% report doing so due to requests directly from plan sponsors.
Consequently, Cerulli recommends that asset managers who are prioritizing distribution of investment strategies within the DC space continue to build their CIT offerings.
Aggregators Moving Downstream
Meanwhile, RIA retirement plan aggregators (e.g., CAPTRUST, One Digital) are increasingly bringing CITs to small- and mid-market plans, the report further reveals.
According to recent Cerulli survey data from DCIO asset managers, more than 70% agree that CITs offer their firm the best opportunity among plans with between $250 million to $500 million (71%) and $500 million to $1 billion (80%) in assets. This drops slightly farther down market, as less than half say the same about the $100 million to $250 million (43%) and the $25 million to $100 million (17%) plan segments, the report shows.
That said, these percentages are up from 34% and 9%, respectively, in 2020. Cerulli notes that increased optimism within these segments can be found in the rise of the aggregators and their role as intermediaries for these small- and mid-market plans. Approximately 70% of DCIO asset managers say RIA retirement plan aggregators are the primary influencers for plans with between $25 million and $250 million in assets.
“While asset managers should not ignore the investment consultants and outsourced chief investment officers (OCIOs) that serve larger plans, they should pay attention to the product usage and buying process of these firms,” the report emphasizes.
Growth Prospects
As to whether CITs will continue to grow, Cerulli identifies three industry trends that will help: diversification of plan types using CITs (e.g., smaller plans), availability within 403(b) plans, and increased availability of investment strategies.
In fact, the Retirement Fairness for Charities and Educational Institutions Act (H.R. 3063)—which seeks to amend the SECURE 2.0 Act to permit 403(b) plans to use CITs—was recently approved by the House Financial Services Committee and is hoped by many to be included in a year-end spending bill. According to Cerulli, this could open some of the $1.4 trillion segment of the retirement market, with larger plans and those working with an intermediary likely to be the first movers.
