CITs Surpass Mutual Funds as Preferred Investment Vehicle for DCIOs

Collective investment trusts have surpassed mutual funds as the preferred investment vehicle for defined contribution investment-only asset managers, according to a Cerulli Associates report.

As of year-end 2022, CIT assets amounted to $4.63 trillion, attributed to improved capital market conditions and sustained demand within defined contribution retirement plans, highlighted in Cerulli’s latest report, “U.S. Defined Contribution Distribution 2023: Adapting to Fiduciary Trends in the Adviser-Sold Market.”

In 2021, asset managers’ DCIO assets by investment vehicle were split closely between mutual funds (37%) and CITs (35%), according to the consultancy’s survey of 30 DCIO asset managers. But as of 2022, CITs (36%) overtook mutual funds (34%), according to Cerulli, which did not provide an exact amount for mutual funds in DCIO investments.

Even with the growth, CIT providers should continue education efforts to get the lower-cost investment options into plan sponsor investment menus, according to the consultancy.

“Advisers lacking sufficient knowledge continue to present a concern for CIT adoption by DC plans,” Idin Eftekhari, a senior analyst at Cerulli, said in a statement. “Providers that are able to develop bespoke educational and fee arrangements will likely see greater adoption of their CIT investment offerings.”

Marketing Needed

To cater to various intermediary channels, CIT providers will need to adjust marketing efforts, fees and minimums, Cerulli recommended. Offering tailored education, especially for retail advisers, is increasingly vital, with 25% of respondents highlighting the knowledge gap as a significant challenge, and 66% considering gaining more knowledge somewhat challenging.

Over the course of the next year, CIT providers plan to focus distribution efforts on plans with assets of at least $25 million, according to the Cerulli report. That segment is generally comprised of retail-focused retirement plan advisers, retirement aggregator firms and institutional investment consulting firms. 

Among providers surveyed, 69% identified the $25 million to $249 million segment as a large focus, while 78% selected the $250 million to $999 million segment as a large focus.

Cerulli’s research revealed that national investment consultants remain the primary channel for distributing CITs into DC plans for 49% of providers. Direct placement of CITs into DC plans remains a leading channel, and distribution through registered investment adviser-based retirement aggregator firms held steady, with 18% of investor and client relationships intermediated by these firms.

Low-Cost Vehicle

Compared to mutual funds, CIT providers view lower costs as the primary benefit of the vehicle, with 66% ranking it as the most significant factor and 25% as the second-most significant. The ability to negotiate fees is also a noteworthy benefit.

Moreover, retirement plan aggregators such as CAPTRUST Financial Advisors and OneDigital are increasingly bringing collective investment trusts to small and midsize retirement plans, as CIT asset growth has outpaced mutual funds since 2018, as reported in October’s Cerulli Edge—U.S. Monthly Product Trends.

“We’re seeing continued adoption of CITs across the board,” says Rob Barnett, CEO of CIT provider Great Gray Trust Company. “We maintain that we don’t see CITs as an absolute end-all-be-all solution for everyone. We see it as a player in the space, but we also think that mutual funds and other types of vehicles are appropriate for plan sponsors as well depending on demographics and the needs of the plan.” 

Plan advisers and consultants play “an integral role” in understanding the client needs and providing the best guidance on whether a CIT is the right fit, and which type, Barnett says. He notes that Great Gray is seeing more retirement plan advisories of all types, whether large aggregators or independents, being more responsive to conversations and education on CIT use with clients.