Have CITs in 401(k) Plans Reached a Tipping Point?

Collective investment trusts (CITs) have long been heralded as “the next big thing” in the DC industry, but a new report suggests that, in recent years, the market has turned a corner.

The third quarter 2018 issue of The Cerulli Edge—U.S. Retirement Edition finds that CIT adoption is finally experiencing a meaningful increase. The firm’s most current sizing of the 401(k) market indicates that as of 2017, more than a quarter of the $5.5 trillion 401(k) market was invested in CITs. This contrasts with a historical market share closer to 20% of total 401(k) assets.

Cerulli notes that this sizing reflects how in recent years, it has observed a decline in mutual fund share of 401(k) assets in favor of a growing CIT share. 

TDFs Leading the Way

Target-date funds (TDFs) reportedly are leading the way in forging a path for greater CIT use by DC plans, and as of 2017, represented 41% of 401(k) plan CIT assets. Cerulli believes that CITs are poised to gain significant assets, and managers can gain market share in the concentrated target-date space.

“Target-date funds have been an important driver of total 401(k) CIT asset growth — in fact, target-date CIT assets increased by nearly 85% between 2015 and 2017,” notes Jessica Sclafani, director at Cerulli. This contrasts with a 45% increase for target-date mutual fund assets for the same period.

Ongoing fee compression, especially in the qualified default investment alternative (QDIA) category, along with rising influence of mid-market consultants looking to distribute their own products using CITs as building blocks, reportedly are among the primary drivers of CIT growth. “Increased CIT adoption has been supported by ongoing fee pressure, along with growing demand from mid-market consultants active in the DC market,” notes Sclafani.

Cerulli asserts that by gaining an understanding of plan participant demographics and plan sponsor preferences, TDF managers are better positioned to convey how their product’s glidepath aligns with a plan’s objectives.

Managers considering the launch of an additional target-date series should conduct a thorough assessment regarding how a new potential series differs from their existing target-date products and those of competitors, the firm recommends.

DCIO Focus

Cerulli further suggests that defined contribution investment only (DCIO) asset managers must offer CITs to “remain competitive in an increasingly crowded distribution channel.” In contrast with two years ago, most DCIO asset managers believe they have CITs available for the products that represent DCIO opportunities—another point to include in the overall case for CITs reaching a tipping point, according to Cerulli.

“DCIO managers are focused on the opportunity presented by mid-market consultants/retirement aggregators that are stepping into the world of product manufacturing, in addition to their traditional role as an intermediary, by building white-label products (target-date and multi-asset strategies) that combine multiple asset managers,” the report states.

Cerulli suggests that DCIOs must carefully weigh the distribution/scale that these situations present versus their pricing philosophy because mid-market consultants aggressively pursue the lowest cost options for inclusion in their products. Moreover, the firm notes that even when DCIOs can gain consensus internally on pricing specific to these opportunities, there is “significant concern regarding downstream implications.”

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