Subscribe to Asset Servicing & Fintech Insights
CITs Trending Up for DC Plans
Efficiency and flexibility make CITs a natural fund solution for retirement plans.
Ryan Dargis, Service & Strategy Enablement, Global Fund Services, Americas at Northern Trust
The growth of collective investment trusts (CITs) in defined contribution (DC) plans shows no signs of stopping.
According to a 2023 Callan survey, 84% of plan sponsors offered CITs as part of their fund options, a 36% increase since 2012. The same survey found that mutual fund options dropped by about 13 percentage points, while the use of CITs rose by more than 30 percentage points.1
Much of that growth has been fueled by CITs gaining ground as a vehicle in target date funds in recent years. According to Morningstar, CITs are responsible for 47% of assets in target date strategies, seeing a 10-percentage market share jump in the five years since 2018 and a 2-percentage point increase since 2021.2
In December 2022, the SECURE (Setting Up Every Community for Enhancement) 2.0 Act was passed, broadening employees’ access to employers’ retirement programs through measures including the requirement of automatic enrollment of participants and the creation of new guidelines for the benchmarking of target date funds as they grow in usage.1
Further, in May 2023, The SECURE Act 2.0: Retirement Fairness for Charities and Educational Institutions Act (H.R. 3063) was introduced, and if passed, could amend the law to permit 403(b) plans to use CITs.2
“SECURE 2.0 was important legislation for the defined contribution market,” said Ryan Burns, Head of Global Fund Services, Americas at Northern Trust. “As the provisions take effect, plan sponsors will want to be sure they offer vehicles that are flexible, cost effective, and efficient. CITs tick each of these boxes.”
What makes CITs an attractive option for DC plans? For one, CITs allow plan sponsors to prudently package up and offer investment strategies covering a broad and growing range of asset classes, including certain alternatives, derivatives, bank debt, and some use of exchange-traded funds (ETFs). This ultimately can lead to more investment diversity and, it is hoped, potential returns, a key draw in an environment where plan sponsors are increasingly seeking to incorporate investments such as alternatives into their plans.
More recently, plan sponsors have tended to deploy custom target date options over their recordkeeper’s offerings. According to Callan, only 16% of respondents used their recordkeeper’s target date option in 2022, a decrease from 59%1 a decade ago. As they look to customize, CITs are a popular choice.
Although subject to banking regulations and certain tax and Department of Labor Employee Retirement Income Security Act (ERISA)-related regulations, the funds do not have to be registered with the Securities and Exchange Commission (SEC), and thus do not require the same oversight and governance structure. In fact, CITs are overseen by a trustee – a sponsoring bank entity with a fiduciary role to ensure equitable treatment of investors that aligns well with the obligations of plan sponsors themselves. This lends itself to less complexity in operating the fund due to fewer regulatory oversight requirements, while keeping a reliable governance structure intact.
This oversight model generally translates into lower overall operating costs, an important consideration in a market where managers are facing expense pressures. And when one combines that efficient pricing with the ability, in certain cases, for investors or their intermediaries to negotiate fees for their CIT usage, that enhances the overall pricing appeal of the structure. According to a report from Cerulli, 88% of CIT providers confirm their willingness to offer a custom fee arrangement.3
Support for Asset Managers Offering CITs
As investment in the retirement space continues to grow and evolve, we can count on CITs’ role becoming more prevalent. And as managers respond to their clients’ growing embrace of CITs, they should arm themselves with the right partners to aid their success.
Familiarity with recordkeeper reporting needs, use of the National Securities Clearing Corporation (NSCC), varying investor related arrangements and deliverables, and support for both the asset manager’s operational requirements and a CIT trustee’s oversight activities all require knowledge and flexibility. In the unregistered fund market, CIT relationships can differ across a fund’s investor base – the ability to support that variation may help enable distribution efforts in the retirement market.
Given the growing market for target date funds and the demand for increased diversity of options, managers that choose to utilize CITs within their retirement fund-targeted strategies will need a servicing partner who understands the importance of the vehicle, has the depth and expertise to service it, and possesses the operational strength and technology to support the complexity of a diverse group of target investment strategies.
Service of the entire CIT ecosystem, its sponsors, and the managers themselves requires the right mix of tenured professionals and engagement to help operationally stand-up funds, support onboarding new plan investors, and evolve the evolution of the CIT market. “At Northern Trust, we have built vast expertise in the narrow niche of ERISA,” said Burns. “We’ve been in this business a long time, have seasoned knowledge, and the global presence and financial security to allow us to partner with the largest CIT providers. That goes a long way when our clients look to us to launch a CIT in their investment line-up.”
1 Callan Institute | 2023 Defined Contribution Trends Survey
2 Cerulli Associates | CITs Continue to Erode Mutual Fund Dominance in Defined Contribution Market
3 Cerulli Associates | CIT Providers Target Mid-Sized to Large DC Plans in 2024
Head of Global Fund Services Americas
© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret), address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386), Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.