The increased uptake of collective investment trusts in the DC plan market raises crucial questions about the future of mutual funds in workplace retirement plans, according to new research by Cerulli.
While CITs have long been in the shadow of mutual funds, Cerulli says CITs are gaining traction and on pace to surpass mutual fund assets in 401(k)s.
Among the diverse benefits of CITs, respondents to survey research by Cerulli found lower costs and fees had the strongest appeal (66 percent), followed by the ability to haggle down fees (19 percent).
“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,” Adam Barnett, senior analyst, said in a statement.
According to Barnett, the DC plan-based distribution model of CITs means asset managers do not have to expend capital to market those funds to retail clients, leading to benefits that trickle down to participants in the form of high-quality, low-cost-profile investment options, which of course has led to growing interest.
Still, mutual funds offer greater visibility into their inner workings, as they come with prospectuses and fee information as par-for-course disclosures. That gives asset managers a means to keep mutual funds competitive by leaning into their transparency on performance, portfolio composition, and overall risk profile.
Cerulli’s research confirmed that the inability to access clean and comparable data on the vehicle is a major Achilles heel for CITs. It found 94 percent of CIT providers see that as a concern, including 19 percent who think it’s a significant challenge and 75 percent who say it’s somewhat of a challenge. That’s another chink in the armor mutual fund asset managers can target by continuing to make mutual fund family data easily accessible.
Mutual funds tend to have a strong foothold in the micro and small plan segments, Cerulli added, as CIT often come with too-steep investment minimums.
Depending on how big a plan sponsor and its goals, mutual funds may make more sense than CITs as an investment product. The upshot is that despite headlines declaring a defection to other investment vehicles, the $19.5 trillion in mutual fund assets within DC plans won’t be moving anywhere any time soon.
“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,” he added.
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