The use of collective investment trusts in defined contribution plans is surging, and if the trend continues CITs assets in retirement plans are expected to overtake mutual funds within the next four years, according to a new report by Sway Research.
Sway estimates that fueled by demand for lower-cost vehicles, defined contribution investment-only (DCIO) assets invested in CITs will surpass $2 trillion of AUM during 2021. Though mutual funds still control the bulk of DCIO assets (possessing 39% market share to 34% for CITs), there has been a significant shift in market share.
At year-end 2018, mutual funds controlled an estimated 45% of DCIO assets to compared to just 28% for CITs. If CIT usage continues to surge, Sway expects these products will overtake mutual funds in DCIO asset share by the end of 2025.
According to the research, most of the growth in CIT usage is coming in large and mega DC plans—those with more than $50 million of assets—while the small- and mid-size plan market, where Sway’s survey is focused, remains more concentrated in mutual fund vehicles.
Most of the growth in CIT usage is coming in large and mega DC plans while the small- and mid-size plan market remains more concentrated in mutual fund vehicles
Sway Research
However, CITs are seeing increased use among advisors of small- and mid-size plans, where roughly one in three plans served by these intermediaries features CITs, not including Stable Value options. As in the upper end of the DC market, usage in smaller plans is mostly driven by the need to bring down expenses.
One-third of specialist DC plan advisors indicated that squeezing costs out of plans to enhance plan retention and/or new sales is a very or extremely important business goal, while another one-third indicated this is somewhat important to their current strategy.
The report says this is not necessarily good news for DCIOs, particularly managers of active strategies, which have been losing ground to lower-cost passive strategies for some time now.
Two-thirds of asset managers surveyed this year indicated earning less revenue on assets in CITs than mutual funds. Most say the difference is slight, while nearly 1 in 5 indicates the drop in profit margin is 10% or more.
The State of DCIO Distribution is Sway Research’s annual benchmarking study on the defined contribution arena. Now in its 15th year, the report provides benchmarks for asset managers as well as feedback from plan advisors. It is based on surveys and interviews of DCIO sales leaders from 21 leading asset management firms with $1.8 trillion of DCIO AUM, and retirement plan-focused intermediaries from 201 advisory practices with more than $130 billion of DC AUM.
Impact of ESG and Managed Accounts
When asked to indicate the share of DCIO sales currently generated in products utilizing ESG screens and managed account solutions, few DCIOs surveyed believe either product type is making a major impact.
However, a lack of granularity in sales reporting data makes it difficult to track sales via these offerings, particularly sales captured via managed account solutions. While ESG is seeing increasing usage among plan advisors, with about 3 in 5 plan specialists now using ESG product in DC plans (up from roughly half three years ago), only about 1 in 5 of these DC plan-focused advisors surveyed use managed accounts as a QDIA (Qualified Default Investment Alternative), which is most commonly a Target-Date series.
And, those plan advisors who do use managed accounts use them as a QDIA only do so in about a quarter of the plans they serve. Despite this, many DCIO executives remain optimistic that the customization allowed by managed accounts will eventually win out, with these products grabbing additional market share and driving greater sales in the years ahead.
Similar optimistic views were expressed regarding the outlook for sales of ESG investments, even though 77% of DCIOs surveyed agreed with the following statement: Media coverage of ESG in DC far outstrips the actual opportunity to capture DCIO assets via ESG product
“Portfolios designed to meet ESG screens and managed account solutions will grow in importance as participants take a more active role in determining how their dollars are invested. But, as with all enhancements to retirement plan menus, success will be achieved via a combination of compelling returns and, most importantly, competitive fees,” said Chris J. Brown, Sway Research founder and principal. “Without attractive fees, few plan sponsors will take a chance on these plan enhancements. And building and maintaining products with these two key attributes is never as easy as it seems.”
Record AUM and improved net sales
Sway Research’s report also shows appreciating stock prices and an improved net sales environment are putting DCIOs on firm ground heading into 2022.
The survey uncovered an average DCIO AUM rise of 30% per firm over the 12 months leading up to June 30, aided by a gain of 10% in just the first half of 2021.
Not all of the rise is the result of increasing stock prices, as two-thirds of the managers in Sway’s annual survey captured positive net sales during the first half of this year—a marked improvement over full-year 2020 when 7 in 10 managers experienced net redemptions from DCIO assets.
This run of asset growth and improved net sales has the DCIO market projected to reach $6 trillion of assets by year-end 2021 and nearly $8 trillion by the end of 2025. Sway estimates DCIO assets will reach 60% of the total DC market at year-end 2025, up from nearly 57% this year.
FREE WEBINAR OCT. 21: CITs in Focus: latest Trends Driving the Rapid Growth of CITs and Outlook for the Future
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