Lower-cost collective investment trusts are gaining 401(k) assets faster than mutual funds as part of a growing trend that's expected to accelerate across retirement plans, a new study said.
Between 2018 and 2022, assets held in the trusts soared by 51% to $4.63 trillion, while holdings in mutual funds expanded by 20% to $16.28 trillion, according to
"The growth of collective investment trusts has been driven by two things: 1) asset managers being willing to view advisors and consultants as one client with an aggregate book of business and 2) asset managers reducing the minimums associated with collective investment trusts," Doss said in an email. "If we go back 10 years, only plans with $500 million and up could access CITs. Now they are open for startup plans without minimums. That's how much it's changed."
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Industry consolidation
"The shift toward the CIT has been propelled by large [defined-contribution] plan sponsors and the intermediaries (e.g., investment consultants, RIA retirement plan aggregators) that work with them," according to the report. "These intermediaries have the scale, sophistication and leverage to take advantage of the lower-cost CITs. Cost, in particular, has been a major driver of CIT adoption, with CIT share classes often cheaper than the least expensive mutual fund share class (e.g., R6 shares [retirement share class]). Asset managers have followed up on increased demand by boosting the supply of CITs."
The largest retirement-plan sponsors have acted as the "early adopters and heaviest users" of the trusts, said Jason Kephart, the director of multi-asset ratings and global manager research
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On the negative side, the lack of standard SEC reports and forms for the trusts makes it more difficult "for a participant in a 401(k) plan to do research on CITs if they want to do their own digging," he noted. However, if the participant, sponsor or financial advisor is using a cloned version of a mutual fund, they can use that product's SEC filings to get more information. They're clearly finding value in the trusts, considering that the assets in the cloned Vanguard target-date funds have surpassed those in the firm's traditional product, Kephart noted. Excessive-fee lawsuits and greater regulatory emphasis on cost concerns are other factors.
"Barring any big regulation changes, I think we're going to continue to see the trend of CIT funds taking away market share from mutual funds for 401(k) plans," Kephart said. "They're cheaper. 401(k) plans have been incredibly fee-sensitive."
The trusts do require "another few extra steps to be able to do the same due diligence you would on a mutual fund," he noted. Cerulli's research and a poll of asset managers who offer the trusts suggested the need for greater examination is playing a role, too. The "most significant challenge" to bigger inflows from 401(k) and other defined-contribution plans comes from "the lack of sufficient knowledge by financial advisors regarding CITs," according to the Cerulli report.
"Beyond the notion that financial advisors need more education, CIT providers also express concerns regarding limited performance history and plan sponsor/financial advisor access to clean and comparable data on CITs within databases as material issues," the report said.
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Captrust provides "a lot of educational content for our advisors and our plan sponsors to get them comfortable with collective investment trusts," Doss said. The main differences between them and standard mutual funds revolve around the fact that the trusts have declarations for plan fiduciaries to sign rather than a prospectus, and they simply reinvest dividends and capital gains instead of paying the customers and reporting them on account statements, she noted.
The bill in Congress to open 403(b) plans amounting to $1.4 trillion in assets to the trusts — the
Advisors and plan sponsors should avoid assuming that the trusts work exactly the same as mutual funds, though.
"CITs may be positioned as clones of their mutual fund counterparts, but there are many ways to set up a CIT that can cause its portfolio, and therefore, its performance, to be different than the mutual fund version," Doss said. "You can get into a situation where the CIT version of an investment strategy is 0.20% cheaper than the mutual fund version, but the performance is 1% worse, so net/net, the investor isn't coming out ahead by using the CIT. They can have different management teams, different investment guidelines and restrictions and different cash flows. Most CITs are very close to their mutual fund counterparts, but you have to be careful and ask the right questions and do the analysis to understand any differences."
