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CITs Trending Up for DC Plans
Efficiency and flexibility make CITs a natural fund solution for retirement funds.
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 2021 Callan survey, 78% of plan sponsors offered CITs as part of their fund options, a 44% increase since 2011. The same survey found that mutual fund options dropped 10 percent, to 85%.1
Much of that growth has been fueled by CITs gaining ground as a vehicle in target date funds, which themselves are increasing in popularity. According to Morningstar, assets in target date funds jumped from $2.3 trillion in 2020 to $2.8 trillion in 2021.2
These numbers are set to grow, spurred on by the SECURE (Setting Up Every Community for Enhancement) 2.0 Act, passed in December 2022, which broadens 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.3
“Secure 2.0 is partially aimed at increasing the number of workers covered by their employers’ retirement plans,” says Ryan Burns, Head of Global Fund Services, Americas at Northern Trust. “As the legislation takes 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 23% of respondents used their recordkeeper’s target date option in 20204, a decrease from 67% 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. Naturally, this is attractive to asset managers -- 93% of managers and CIT sponsors indicated last year that lower costs and fees were very important to the development and distribution of CITs.5 Plus, 59% of managers polled in 2021 also noted they were very or somewhat likely to move to lower-cost investment vehicles, making CITs an ideal option.6 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.
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,” says 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 CITs gaining ground in investment menus — Callan | Pensions & Investments (pionline.com)
2 Pensions and Investments, “Target-date funds see assets climb in 2020 despite pandemic – Morningstar”, March 18 2021.
3 How SECURE 2.0 reforms affect retirement plans | Vanguard
4 Callan 2021 DC Survey Focuses on Pandemic's Impact on Plans
5 Cerulli, “Trends in the Collective Investment Trust (CIT) market survey”, 2022 in partnership with the Coalition of Collective Investment Trust.
6 Callan 2021 DC Survey Focuses on Pandemic's Impact on Plans
Head of Global Fund Services Americas
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