Collective investment
trusts, the increasingly popular retirement-plan investments that seem like
mutual funds but aren’t, are ballooning.
Data from financial-services
company ALPS shows that assets in collective investment trusts, or CITs, could
surpass the $3 trillion mark by the end of 2018, up from $1.9 trillion at the
end of 2015.
Much of this is thanks to 401(k)
plan sponsors adding CITs to the menus of investment choices that they offer
their plan participants. The 2018 Defined Contribution Trends Survey from
investment consultant Callan shows that such use of trusts in 401(k)s has
jumped 48% since 2011, while the use of mutual funds has decreased.
Lower costs
When CITs are added to
retirement plans, plan participants have new ways to expand their nest eggs.
The trusts are sponsored by banks and trust companies, and so are primarily
overseen by banking regulators. Thus, even though the trusts tend to mirror
mutual funds in the types of assets and strategies they use, they have lower
management and distribution costs because they aren’t subject to Securities and
Exchange Commission rules.
CITs are increasingly
available through financial advisers as well. John Alshefski, senior vice
president and managing director of Investment manager services at money manager
SEI, says he’s hearing from more advisers that are interested in offering their
strategies in a collective trust.
“CITs have always been an
option for the retirement market, but once a manager sees that they can offer a
CIT cost-effectively, it’s a no-brainer,” he says. Many advisers are offering
their investment strategies as a mutual fund and a CIT to give plan sponsors
more options.
Historically, CITs have been
used as a way of making active management available to investors at a lower
cost. But Charlie Morrison, head of asset management at Fidelity Investments,
says his company has taken steps to offer CITs with a wider range of
investments.
“Some of the larger plan
providers we work with said they were interested in building out their passive
solutions, so we have helped with that,” he says. “The bulk of our CIT
offerings have been the result of client demand.” Coupled with the growth of ETFs,
plan sponsors can now put together a traditional 60/40 stock/bond portfolio in
a CIT, shaving another percentage point or two off retirement-plan expenses.
The biggest retirement plans
have always been able to offer participants the ability to customize their
accounts, largely because of their size. But money-management firms are more
willing to offer customization to smaller plans as overall costs to manage them
have come down.
Todd Lacey, head of the
retirement group at Stadion Money Management in Watkinsville, Ga., says that
using a CIT structure, Stadion can create customized accounts for small and
midsize plans using all low-cost products in a CIT wrapper. His company’s
StoryLine retirement product, for example, has five CITs made up of ETFs. Based
on the risk profile of a given plan, Stadion can create customized retirement
offerings by using the five CITs.
Innovation opportunity
“We’ve been operating on
this one-size-fits-all model with 401(k)s and target-dates where we aren’t
looking at factors like when people start participating,” Mr. Lacey says.
“There’s a recognition in the industry that this isn’t great,” he adds, and
“there is an opportunity with CITs to jump-start some of that innovation.”
One drawback of CITs,
meanwhile, has been their lack of a trading symbol, making it difficult for
401(k) participants to track how the trusts are performing and compare them
with other investments. Some companies that offer CITs, though, now offer
mutual funds with identical asset mixes and strategies as the CITs they offer.
So, CIT investors can use the mutual fund as a proxy for the CIT performance,
because both are using the same strategy.
CIT providers understand
that the market expects daily information, says Shelby George, senior vice
president of advisory services at investment firm Manning & Napier.
“What we’ve seen with [CITs]
is a lot of innovation behind the scenes in terms of improving the timeliness
of reporting, getting more performance information out there, in addition to
expanding the strategies that are available in a CIT,” she says. Ms. George
adds that she wouldn’t be surprised to see a third party step in and start
offering CIT research and ratings, similar to what Morningstar does for mutual
funds.
Fiduciary standard
The growth of CITs in recent
years also may be getting help from the pressure on retirement plans and
financial professionals giving retirement advice to act as fiduciaries—a legal
requirement to act in the client’s interest. That responsibility adds to costs,
advisers say. CITs, by contrast, because they are overseen by banking
regulators, are already held to a fiduciary standard, and the cost and fees are
already built in.
Francisco Negron, head of
client services at T. Rowe Price , which
maintains some of the largest CITs, sees the size of the retirement industry as
a tailwind for CITs.
As retirement-plan assets
grow, he says, “sponsors are more focused on cost and standards than ever.”
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