American Funds offering TDFs in collective investment trusts

The firm is one of the last holdouts to launch CITs, signaling increased demand for the investment vehicle

Aug 3, 2018 @ 1:29 pm

By Greg Iacurci

Capital Group, the asset manager behind the American Funds investment brand, is planning to offer its target-date mutual funds in a collective-investment-trust-fund vehicle later this year, in a move to seize on the growing popularity of CITs in 401(k) plans.

Capital Group is among the retirement industry's largest and fastest-growing TDF providers, managing $89 billion in target-date mutual-fund assets at the end of 2017, according to Morningstar Inc. The company manages more than $1.8 trillion in total assets worldwide.

It is also one of the "few big players" that doesn't currently offer collective investment trust funds to 401(k) plans, said Chris Brown, founder and principal of Sway Research, which studies investment distribution in retirement plans.

Capital Group, along with TIAA Investments and John Hancock Investments — respectively the fifth-, ninth-, and twelfth-largest TDFs providers — are the only major providers to offer the multi-asset funds in mutual funds only, according to Sway data.

By comparison, other large providers, such as Vanguard Group, Fidelity Investments and T. Rowe Price, have made target-date CITs available since 2007-08.

"We have been following the market very closely and speaking with our clients, and it's clear that there is a growing demand for CITs," Ralph Haberli, sales director for Capital Group's institutional retirement unit, told InvestmentNews.

A Capital Group spokesman didn't specify the time frame for the CIT launch of its American Funds Target Date Retirement series. He also didn't say whether the firm is planning on making other asset classes available in collective trust funds.

Advisers and employers have turned to collective trust funds primarily as a way to reduce investment costs, which have become a top concern in an environment of hyper fee sensitivity and increased litigation activity around excessive 401(k) costs.

The vehicle often yields cost savings when compared with mutual funds because CITs generally have lower operational expenses, are restricted from advertising to the public and don't have to file prospectuses, shareholder reports and proxy statements.

Asset managers focused on active management of their funds, such as Capital Group, have been pressured to reduce fees as index funds, which are often lower in cost, have surged in popularity in 401(k) plans and the broader retail market.

CITs are regulated by the Office of the Comptroller of the Currency and are only available to retirement plan participants, unlike mutual funds, which are overseen by the Securities and Exchange Commission and are also available to retail investors.

In the largest 401(k) plans, those with more than $1 billion in assets, collective funds already hold a greater share of assets than mutual funds — 40% versus 28%, respectively, according to a study by the Investment Company Institute and BrightScope Inc. Mutual funds still reign as king among smaller plan sizes, but the gap is narrowing.

Target-date funds have become the most popular investment option in 401(k) plans over the past decade. American Funds as the fastest-growing TDF provider on a percentage basis between 2015 and 2017, with a 58% annual growth rate, according to Sway Research.

The fund brand saw $24 billion in net positive flows into its TDFs last year, according to Morningstar data. Those flows represented 145% of the firm's total mutual-fund flows in 2017 — meaning Capital Group would have seen outflows at the firm level had it not been for the target-date series' growth.

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