The Rise of Collective Investment Trusts in DC Plans: Implications for Mutual Funds

The landscape of retirement investing is evolving, and the rise of collective investment trusts (CITs) in the DC plan market is causing a shift in the traditional dominance of mutual funds. According to recent research by Cerulli, CITs are gaining momentum and are on track to surpass mutual fund assets in 401(k) plans.

One of the key factors driving the popularity of CITs is their lower costs and fees. Cerulli’s survey found that 66 percent of respondents were drawn to CITs because of their cost-effectiveness, with an additional 19 percent appreciating the ability to negotiate fees. This cost advantage is attributed to the distribution model of CITs, which allows asset managers to offer high-quality, low-cost investment options to participants without the need for expensive marketing efforts.

However, despite the appeal of CITs, mutual funds still hold a strong position in the retirement investment market. Mutual funds offer greater transparency through prospectuses and fee disclosures, giving investors insight into performance, portfolio composition, and risk profile. This transparency is a key advantage that asset managers can leverage to maintain the competitiveness of mutual funds.

One challenge facing CITs is the lack of clean and comparable data on the vehicle, with 94 percent of CIT providers citing this as a concern. Additionally, CITs often come with high investment minimums, making them less accessible to micro and small plan segments. Depending on the size and goals of a plan sponsor, mutual funds may still be the preferred investment product.

Despite the growing interest in CITs, the $19.5 trillion in mutual fund assets within DC plans is unlikely to shift significantly in the near future. Asset managers who do not offer CITs must focus on lowering expense ratios for their actively managed funds and specialty investment strategies to remain competitive in the evolving retirement investment landscape.

In conclusion, the increased uptake of CITs in the DC plan market raises important questions about the future of mutual funds in workplace retirement plans. While CITs offer cost advantages and are gaining traction, mutual funds continue to provide transparency and accessibility that appeal to investors. Asset managers must adapt to the changing landscape by offering competitive investment options that meet the diverse needs of plan sponsors and participants.