Use of Collective Investment Trusts (CITs) continues to come down market as even small and mid-sized 401(k) plan sponsors are now demanding access to the vehicle as a lower cost alternative to a mutual fund.
Resurgence of CITs
The resurgence of CITs in 401(k) plans started with Fortune 500 companies that had plan assets of over $1 billion. These companies and their consultants recognized that a retail mutual fund was not the most efficient vehicle for their qualified plan assets and wanted to leverage their scale and purchasing power with investment managers. Many plan sponsors were also forced into the CIT structure by the courts in well publicized lawsuits over high fees at companies such as Walmart, John Deere, Consolidated Edison, and many others. The CIT was the ideal solution for many of these plan sponsors, offering the customization and fee flexibility of a separately managed account while still providing the ease of use similar to a mutual fund.
In fact, according to a report from Callan*, 75% of the plans surveyed in 2018 offer a collective trust as a plan option. In 2011, the rate was just 44%. Over that same period, transaction volume in dollars settled in CITs at the Depository Trust & Clearing Company (DTCC) increased over six-fold from $95 billion in 2011 to $586 billion in 2018. With total CIT assets currently at $3.1 trillion, CITs continue to take market share from mutual funds within the retirement plan market and now represent over 25% of all 401(k) assets according to a report from Cerulli Associates**.
CITs for All Plan Sizes
With CITs and separate accounts already dominating the mega-plan market, the next $3.1 trillion in CIT assets is likely to be driven by small and mid-sized plans. When asked by Cerulli***, 30% of plan sponsors with assets between $500 million and $1 billion mentioned “converting mutual funds to CITs” as an expected change in the coming plan year. 22% of plan sponsors with assets between $250 million and $500 million cited the same. Those numbers were up from 11% and 15%, respectively, when compared with the previous year. This trend of CITs coming down market is likely to persist due to continued pressure on fees, litigation, and increased awareness by the consultant and financial advisor communities.
As mutual fund providers and investment management companies rethink how they approach the 401(k) market, many have been forced to reduce or eliminate minimum investment levels for CITs, allowing for use in smaller plans. The following trends in the 401(k) market also point towards greater use of CITs:
- Focus and scrutiny on fees and fiduciary responsibility
- Customization of target date funds and managed account solutions
- Consolidation and specialization of 401(k) consultants
- Potential legislation on multiple employer plans (MEPs)
The overriding theme of these trends is a focus on increasing scale and efficiency, allowing plan sponsors to deliver a better, lower cost solution to their participants. Collective Investment Trusts (CITs), due to their inherent efficiencies and streamlined structure, will continue to benefit as these trends move down market. To fully benefit from this trend of CITs coming down market, plan advisors and investment managers need to partner with trust companies that have strong transfer agency services. Having trading agreements already in place with the appropriate platforms that service small and mid-sized plans will be a key advantage for firms looking to access these markets.
*Callan Institute Survey: 2019 Defined Contribution Trends
***The Cerulli Report: U.S Defined Contribution Distribution 2017: Re-Evaluating the Use of CITs in DC Plans
Gregg Zimmerman, CFA®, CIMA® is a Senior Investment Analyst at Hand Benefits & Trust, a BPAS Company.