Data & Research March 17, 2010

Target-Date CTFs Taking Hold in the DC Market

Collective trust funds (CTFs) are experiencing a renewed interest over the last few years in the defined contribution landscape, according to the latest retirement-focused research from Cerulli Associates.
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Target-date CTFs are taking hold due to their low fees, flexibility, and fiduciary structure and as a result, these products are poised for growth, Cerulli said. The latest findings of an ongoing survey of asset managers that captures CTF metrics and opinions reveal that asset managers are largely developing CTFs because of client demand, and they are most concerned about competition from their peers.     

Cerulli explained that the structure of CTFs gives them a particular advantage over mutual funds in target-date products.  Banks that act as trustee of a CTF by definition must act as fiduciaries for the fund’s assets; therefore, if pending regulations force investment managers to have greater fiduciary responsibility over target-date funds, CTFs will have an advantage over mutual funds as they are already providing this service, according to the press release.     

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Another advantage CTFs have over mutual funds is the added flexibility to invest in alternative asset classes, such as direct real estate, according to Cerullil. CTFs could invest in non-correlated asset classes—making them a better single-fund solution for target-date investors.     

However, Cerulli noted that only a few target-date CTFs are using alternative investments, perhaps because the market is still young, or trustees are reluctant to take on additional fiduciary risk.     

Cerulli also found that product developers working to build a CTF business for legacy ’40-Act fund companies are poised to have a good year. In a recent Cerulli survey, 29% of respondents expect CTF asset growth in 2010 to increase by 20% or more and 53% believe it will increase by 10% to 20%.

While Cerulli believes target-date CTFs are poised for success, it is difficult to predict the future of these products without more information from CTF providers. CTFs have historically disclosed very little about their products to research firms, and Cerulli encourages firms to participate in industry surveys and databases to increase transparency in this industry.

More information about the report is available at www.cerulli.com.

Data & Research March 17, 2010

Schwab Sees More Rolling Into IRAs

Data from Charles Schwab shows that more people are rolling 401(k) savings into an individual retirement account (IRA) when leaving a job.
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According to Schwab data, 69% of assets held by some 12,200 401(k) participants who left their job in the fourth quarter of 2008 had been distributed from former employers’ plans one year later by the end of 2009. Moreover, an overwhelming majority of those assets was rolled over into IRAs.     

Of the distributed assets in the Schwab data:

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  • 80% were rolled over into IRAs;
  • 10% were taken in cash distributions; 
  • 8% were moved into new employer plans; 
  • 2% were taken in other forms of distributions. 

A prior analysis conducted by Schwab from the beginning of 2008 to the beginning of 2009 found that 57% of 401(k) assets held by workers who left their job had been distributed one year later, with three-quarters (75%) of those distributed assets were rolled over into IRAs.

“We are definitely seeing an uptick in the number of 401(k) plan participants who choose to roll over plan assets instead of cashing out or leaving savings with a previous employer,” said Catherine Golladay, vice president of 401(k) advice and education at Charles Schwab, in a Schwab release. “Consumers have been made more aware of the importance of saving for retirement, and when it comes time to change jobs, more people are thinking through their options for how to make the most of the money they have already saved.”

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