Investment Strategies

CITs Assert Greater Dominance In Defined Contribution Plans

Competitive pricing and transparency will play a crucial role in maintaining mutual funds as an appealing investment vehicle

A new report from Cerulli Associates explores key trends affecting the U.S. retirement market. Access the complete report here.

June 17, 2024, BOSTON—The growing adoption of collective investment trusts (CITs) in the defined contribution (DC) market has raised questions about whether mutual funds are heading toward obsolescence. Factors such as pricing, fee transparency, and investment minimums are just a few variables that shape whether mutual funds will remain a competitive investment vehicle, according to the latest Cerulli Edge—U.S. Retirement Edition.

CITs have been a part of the U.S. retirement system from the beginning but are largely overshadowed by their more well-known mutual fund counterparts. Recently, CITs have gained marketshare and are overtaking mutual funds in 401(k)s.

The benefits of CITs over mutual funds are plentiful and readily apparent. When considering the benefits of offering a CIT versus a mutual fund, respondents cite lower cost/fees (66%) and the ability to negotiate fees (19%) as the most significant benefits. “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,” says Adam Barnett, senior analyst. “Therefore, asset managers do not have to expend capital to market their funds to retail clients. This reduction in fees begins at the top and trickles down to participants, allowing for high-quality, low-cost-profile investment options.”

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

However, mutual funds, being older and common outside the DC space, offer greater clarity to their inner workings, with prospectuses and fee information available on platforms. Asset managers can help keep mutual funds competitive by underscoring their transparency—particularly when it comes to performance, portfolio composition, and overall risk profile.

One of the major drawbacks of CITs is the inability to access clean and comparable data on the vehicle within databases. According to Cerulli research, 19% of CIT providers view this as a significant challenge for CIT adoption, while 75% of CIT providers view this as somewhat of a challenge. Mutual fund asset managers can capitalize on this limitation by continuing to make mutual fund family data easily accessible.

Mutuals Funds Aren’t Going Anywhere

Cerulli asserts mutual funds will continue to suit the interests of plan sponsors and their advisor partners in certain segments of the market. Mutual funds tend to have a strong foothold in the micro and small plan segments because CITs’ investment minimums often are too prohibitive to meet. Depending on the size of the plan sponsor, and its goals, pursuing CITs may or may not make sense.

“With more than $19.5 trillion in assets, mutual funds are not going anywhere any time soon,” says Barnett. “As competition among investment vehicles ramps up, plenty of opportunities for mutual funds remain in the DC market. 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.”




About Cerulli Associates
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Headquartered in Boston, Cerulli Associates is an international research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.