Mutual Funds Maintain Lead in DC Adviser-Sold Market

Sales activity in the adviser-sold defined contribution market reveals that mutual funds are continuing to hold their own in the space despite the rise of collective investment trusts, according to ISS Market Intelligence’s latest first quarter 2024 edition of the “Windows into Defined Contribution” series.

As of Q1 2024, fund and trust assets in the adviser-sold defined contribution market reached $1.27 trillion, based on data from the ISS MI BrightScope NEXUS consortium, which included input from 44 asset managers and recordkeepers, mainly focusing on small- and mid-sized plans. BrightScope, like PLANADVISER, is owned by ISS STOXX GmbH.

BrightScope’s findings marked an increase from $1.11 trillion at the end of 2022, but remains below the $1.37 trillion peak at year-end 2021. Despite fluctuations in market returns, investor demand persisted, reflecting stable retirement participant behavior valued by managers, the research explained. From early 2022 through Q1 2024, funds and trusts amassed $92.6 billion in net inflows.

The adviser-sold market encompassed numerous plans managing smaller asset pools, unlike the consultant-driven market, which included fewer plans with substantial assets, according to the report written by Alan Hess, vice president of U.S. fund research with ISS Market Intelligence.  

The report revealed that 401(k) plans with over $1 billion in assets represented only 1.5% of plans, but held 59.8% of the assets. In contrast, nearly 90% of plans within the NEXUS consortium manage less than $10 million each. That distribution influenced the effectiveness of various investment vehicles. Mutual funds, being the traditional choice for retail and retirement investing, maintained a significant lead in assets and inflows among the sample set.

Though structures across investment channels have attempted to replace the traditional role of mutual funds, competition between vehicles has remained, according to BrightScope. Mutual funds have held on better in the small- to mid-sized plan market, despite losing market share to collective investment trusts in the largest DC plans.

In Q1, mutual funds saw gross inflows of $71.1 billion as compared to $12.7 billion for CITs. That compares to $95.8 billion in mutual fund flows for Q4, as compared to $23 billion for CITs.

CITs have continued to grow in the higher end of the market due to their customizability, Hess and team noted. Unlike mutual funds, CITs are not publicly offered and are exempt from SEC regulation, allowing them to provide tailored fee schedules, which is highly attractive in a market sensitive to fee litigation, BrightScope said. Managers are incentivized to offer favorable fee structures for larger asset pools, solidifying CIT usage among mega plans.

CITs dominated target-date funds for plans exceeding $1 billion in assets, but hasn’t effectively penetrated smaller plans. BrightScope stated that it’s more practical to offer custom products to a few large plans than many smaller ones, giving mutual funds an advantage in gross inflows.

Though CITs experienced faster growth in 2021, their inflow rates have since slowed. In 2022, CITs had gross inflows of 29% of prior year-end assets, just below the 30% for mutual funds. In 2023, CITs’ inflow rate of 34% slightly trailed the 35% of mutual funds.