CITs continue taking over in 401(k)s, but the change isn't always easy

Investment providers launched just one target-date mutual fund series in the U.S. in 2020, while six pulled the plug on them, marking the second year in a row that the number of products on the market went down.

Behind that trend, according to data from Cerulli Associates, is the rise of collective investment trusts, or CITs. The products, which are sponsored by banks or trust companies, function similarly to their mutual fund corollaries but don't have the same reporting requirements.

A key benefit, which is not lost on retirement plan advisers, is cost. Retirement plan participants stand to save a least a few basis points, and much more in some cases, by having CITs in their plans rather than similar mutual funds.

CITs are also on track to surpass target-date mutual funds within DC plans. Data published earlier this year by Morningstar showed 43% of all target-date assets last year were in CITs, or $1.18 trillion, compared with $1.57 trillion in mutual funds. In 2014, CITs accounted for less than a quarter of target-date money.

And CITs are increasingly going down-market, becoming available to smaller retirement plans, which means that they are more widely available than ever.

One 3(38) investment fiduciary, Two West Advisors, is in the process of moving about 100 retirement plans out of a BlackRock target-date mutual fund series and into a CIT, GoalPath Index, for which Two West Advisors acts as a subadviser.

Because those 401(k)s are all part of the same Transamerica pooled plan, every plan sponsor had to agree in writing to the change, Two West CEO Marko Ungashick said at last week’s RPA Convergence Aggregator Roundtable and Think Tank.

All but one were onboard, Ungashick said.

“You try to get the message out to 100 plans to explain the change and why it’s beneficial to their employees, but that doesn’t mean it resonates with every plan,” he said. “We had this one plan that didn’t want to sign the authorization.”

It turned out that that employer was considering leaving the pooled plan, so it didn’t want to sign off on something that could potentially lead to confusion for its participants. But once it was explained that the change would happen after the employer left the pooled plan, the plan agreed to sign so that the CIT could move forward for the other participating employers, Ungashick said.

Generally, plan sponsors, advisers and consultants are aware of the potential benefits of CITs, he said. Occasionally, there are questions about performance history, with some CITs being newer, he said. “We did a series of videos, as the 3(38) [fiduciary], explaining why we were making the move to these CITs, and the pros and cons.”

By the end of the year, the two CIT target-date series Two West Capital Advisors subadvises — GoalPath Index and GoalPath Index Enhanced — will represent about $400 million, he said.

Nearly all CIT providers point to lower costs as a factor in developing their products, according to the recent report from Cerulli. Operationally, CITs are less expensive than mutual funds.

“In recent years, many CIT providers have lowered their investment minimums and, in certain cases, waived minimums altogether,” according to the report. “CITs with low (or no) investment minimums are more tenable investment options for smaller plans and adviser firms, and could help promote stronger adoption down market.”

Years ago, CITs had to overcome obstacles in 401(k)s because plan sponsors wanted the same level of transparency they would get with mutual funds. Now, it's common for CITs to have ticker symbols and informational sheets similar to prospectuses.

For retirement plan advisers, “there is an educational opportunity for plan sponsors,” Scott Smith, head of product and vendor management at Hightower Advisors, said at the RPA Aggregator event.

Some plan sponsors that could use CITs don’t know how they differ from mutual funds, William McPhaden, national accounts manager at Wilmington Trust, said at the event.

“We have I think some of the best industry education pieces,” he said. “The education piece is the biggest hurdle for CITs.”

However, Jeffrey Cullen, managing partner at Strategic Retirement Partners, said some advisers could also benefit from a crash course in CITs.

“I don’t think it’s a plan sponsor issue. I think it’s an adviser issue,” Cullen said, also speaking at the RPA Aggregator event. “The only barrier we’ve seen is getting the adviser comfortable with CITs.”