As the number of collective investment trusts (CITs) grows in defined contribution (DC) plans, new research by Cerulli Associates questions the future state of mutual funds.
While mutual funds have largely dominated 401(k) plans in the past, increases in CIT usage has led some experts to question whether the funds are slowly phasing out of the U.S. retirement system. A recent report from Morningstar found that CITs are currently on pace to overtake mutual funds as the most popular target-date vehicle in 2024, as they now represent 49% of the 401(k) market.
CITs could also soon be expected in the 403(b) plan system, as The Expanding Access to Capital Act, which would authorize the use of collective investment trusts in 403(b) plans, heads to the Senate for passage. Large industry groups including the American Retirement Association (ARA), the Insured Retirement Institute (IRI) and the Investment Company Institute (ICI) have all expressed support for the bill.
Other factors including pricing, fee transparency, and investment minimums could shape the presence of CITs and mutual funds in retirement plans, writes Cerulli research. When considering the benefits of offering a CIT versus a mutual fund, respondents in Cerulli’s findings said lower cost/fees (66%) and the ability to negotiate fees (19%) are the most significant benefits.
“CITs, on aggregate, have far lower management fees than mutual funds of a similar composition. This is due to several factors, not the least of which is the fact that CITs are available only to individual investors through DC plans,” says Adam Barnett, senior analyst, in a statement. “Therefore, asset managers do not have to expend capital to market their funds to retail clients. This reduction in fees begins at the top and trickles down to participants, allowing for high-quality, low-cost-profile investment options.”
Still, the reliability and familiarity that mutual funds offer is a key incentive for investors, adds the research. Cerulli notes that asset managers wanting to continue offering mutual funds could emphasize its transparency, especially regarding performance, portfolio construction, and overall risk profile.
Furthermore, limited accessibility with CIT data has been cited as a major drawback for asset managers and providers. According to Cerulli research, 19% of CIT providers say this is a significant challenge for CIT adoption, while 75% of CIT providers believe this to be somewhat of a challenge. Cerulli adds that asset managers could take advantage of this limitation by making mutual fund family data easily accessible.
As a result, Cerulli expects to continue seeing adoption among micro and small plan markets as CITs’ investment minimums could be too restrictive for these groups.
“With more than $19.5 trillion in assets, mutual funds are not going anywhere any time soon,” says Barnett. “As competition among investment vehicles ramps up, plenty of opportunities for mutual funds remain in the DC market. At the same time, asset managers that do not offer CITs as an investment vehicle must consider ways to materially lower expense ratios for their actively managed funds and specialty investment strategies to remain competitive.”
SEE ALSO:
- CITs Dominate Investment Strategies for 2023
- CITs in 403(b)s Bill Headed to Senate
- CITs in 403(b)s Clears Another Hurdle
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.
