For over a decade now, pundits have been predicting a mass movement of 401(k) plans away from mutual funds and toward collective investment trusts. Migration numbers have not borne that out — yet. But now, some forecasts suggest the time of mass conversions has finally come.
Jessica Sclafani, an associate director at Cerulli Associates, reports that, while CIT use by defined contribution plans has been hovering around 20% for three years, momentum is building. The percentage of 401(k) sponsors with $500 million to $1 billion in assets expected to convert to a CIT option jumped from 11% in 2016 to 30% in 2017, according to an annual Cerulli Associates survey of 800 401(k) plan sponsors.
"As their mandates come up for review, plan sponsors face choices," said Michael Andrews, product consultant at DST Research Analytics and Consulting.
Cost differences
Cost is the prime driver in the competitive DC marketplace, where mandates are won or lost by as few as five basis points. CITs can offer lower operational expenses than mutual funds because they are spared the costs of advertising, shareholder reports and prospectuses. They can also provide tiered pricing, customized fee deals and economies of scale.
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Previously, CITs were more suited to medium to large plans. That has changed over time, but some CITs, which often require higher minimums, still may not be accessible to smaller plans. "There is a point on the continuum where the cost advantage of setting up and administering a CIT is appropriate," Mr. Andrews said.
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A spate of lawsuits over 401(k) fees has heightened the focus on containing costs and avoiding litigation. "There is pressure to get the lowest costs possible, but still provide funds that are value-additive," said Aaron Pottichen, president of retirement services for CLS Partners.
The cheapest route might seem to be a mutual fund with R6 share classes that rebate revenue-sharing back to participants. But Mr. Pottichen said that on many record-keeping platforms, revenue share is not rebated until the end of the quarter, magnifying even a few basis points of opportunity cost.
The reputation of CITs has suffered amid criticism that they are black boxes, but the vehicles are now becoming more transparent. Asset managers have responded to those criticisms with increased willingness and resources to ensure reporting of holdings and quarterly fact sheets.
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Various tool sets have become available from consultants such as Retirement Plan Advisory Group. Fi360 is one such research platform, designed to help advisers perform quantitative analysis and comparisons on their investments. Tyler Harrison, president of advisory firm Efficient Plan, uses Fi360 for quarterly monitoring and due diligence. He reports that, "over the past year they have enhanced their database, tracking how CITs have increased their share of the pie."
Midmarket consultants also are growing more comfortable and knowledgeable about CITs. Some are even creating their own products using CITs in a subadvisory fashion. Still, educational awareness remains an ongoing process, especially among smaller plans with less than $20 million in assets.
Along with their lower costs, CITs have another draw: They can invest in some types of assets, such as real estate, that are not easily included in mutual funds. CITs also can be customized to the unique needs of the plan at the investment level and, unlike mutual funds, they can hold investments like stable value funds, said Ken Verzella, vice president of product deployment at MassMutual.
Not everyone is a believer. Jeff Holt, associate director at Morningstar Inc., expects that CITs and mutual funds will continue to coexist and does not see "a mass exodus to CITs any time soon."
Vanessa Drucker is a freelance writer.
