Collective investment trusts (CITs) have officially outpaced mutual funds as the most popular target-date vehicle this year.
That’s according to Morningstar’s annual target-date landscape report, which found that target-date assets crawled past mutual funds with 50.5% of target-date assets as of June 2024, compared to 49.5% for mutual funds. In fact, mutual funds decreased substantially in their target-date market share, falling from 71% in 2015. In total, CITs surpassed mutual funds by $1.9 trillion.
Morningstar had previously predicted that CITs would dethrone mutual funds in 2024, finding that in 2023, 67%—or $104.5 billion—of net inflows into target-date strategies went into CITs, for a total of $156 billion. Net flows had increased year-over-year, for a record high of $3.5 trillion. In 2022, the investment researcher estimated CITs would overtake mutual funds within two years.
“Morningstar’s annual target-date landscape report took note of target-date CITs’ growth trend, which isn’t slowing. “Their market share rise has been steady since 2015, gaining about 2 to 3 percentage points each year,” wrote Morningstar Senior Analyst Megan Pacholok in the report.
Yet flows weren’t the only indictor of success for CITs, Pacholok added. According to its data, over $22.6 billion in target-date mutual funds converted to CITs in 2023. For some investment firms, target-date CITs is likelier to perform better than their mutual fund counterparts, the report found. While Vanguard’s Target-Retirement series proves successful for both vehicles, BlackRock and State Street had more assets in target-date CITs than mutual funds.
The investment fund is likely to grow even further as it enters plans outside the traditional 401(k). Earlier this month, a bipartisan group of four Senators introduced the Retirement Fairness for Charities and Educational Institutions Act, which would allow 403(b) plans to offer CITs as part of their investment menu options.
The bill has since garnered widespread support, including from the American Retirement Association (ARA) and the Investment Company Institute (ICI).
Pros and Cons
Despite their growth, Pacholok notes one major hurdle with CITs: They are not as transparent as mutual funds. For example,they don’t have to disclose their managers, their experience, if they’ve joined or left the strategies recently, or if they invest in the portfolios, according to Morningstar. Within Morningstar’s target-date CIT database, 88 out of 141 strategies—or 62%—do not disclose manager names.
However, their affordability compared to mutual funds tends to outweigh that disadvantage. CITs tend to be cheaper because they are not subject to reporting standards under the Investment Company Act of 1940.
Expenses tend to fall further as plan sponsors and clients can negotiate CIT fees with providers, especially for large retirement plans. They are also likelier to have lower administrative costs.
“These lower fees have driven CIT growth, especially since plan sponsors loathe lawsuits accusing them of offering overpriced investment options in their retirement programs,” Pacholok writes. “This is a good trend because lower costs mean more money for retirees.”
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
