A Brighter Future

While the growth of CIT assets to date in defined contribution plans is already significant, several new developments in the rapidly changing landscape of the DC space are laying the groundwork for additional future growth.

The three most important development opportunities for asset managers to explore and participate in include:

  • The potential growth of open multiple employer plans (MEPs)
  • Proposed changes to 403(b) rules to allow for broader CIT usage
  • The rising demand for retirement income solutions

Open MEPs: While the lowering and even elimination of minimum investment requirements has helped CITs move more into the mainstream, their presence in the under $10 million market is still limited (Figure 3).

Figure 3 | Percentage of DCIO providers experiencing increasing demand for CITs, by market segment, 2019

plan asset size comparison with largest demand in $50-$100 million and $100-$500 million

Source: RLF 2019 DCIO Survey

However, with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 comes the promise of much broader adoption of multiple employer plans in the form of pooled employer plans (i.e., open MEPs). Prior to this new legislation, small business owners had to have a common business interest or affiliation to qualify for a MEP. Now, after the passing of the SECURE Act, any set of employers—related (e.g., members of an association or similar industry group) or not—can participate in an open MEP. These products offer small business owners a cheaper product with less administrative burden. In most of the potential solutions being considered, firms are looking at CITs, noting that their competitive pricing and investment flexibility give firms—recordkeepers, advisors and DCIOs alike—a chance to differentiate. However, there are still a lot of gray areas concerning the open MEP offerings. While the industry continues to get additional government/policy clarity on how to implement open MEPs, asset managers and recordkeepers are lukewarm about the immediate impact of open MEPs but are nonetheless gearing up for a long-term play, with 83% of recordkeepers planning to pursue the open MEP opportunity.11

Retirement Income: The SECURE Act includes a provision to provide plan sponsors who adopt annuity products with long-sought safe harbor protection. Much like with open MEPs, the industry is concerned about several gray areas that need additional clarification. Outstanding questions cover a broad range from the portability of any annuity product within a plan to bridging the participant education gap. Despite these issues, leading insurance firms are looking to build new income solutions for retirement plans. In fact, a 2020 RLF survey12 found that 83% of insurers planned to roll out new, in-plan annuity solutions in the coming 24 months.

In speaking with a number of these insurers for this report, we found the most interesting innovations aren’t standalone annuity products but rather an annuity built into a managed account or target date product. CITs would be the most likely vehicle to hold this diverse set of products. If firms can succeed in addressing some of the outstanding issues and get sponsors comfortable with their fiduciary responsibility as it relates to annuity products, the managed account or target date offering with CITs and income products would be the most appealing solution. Another income solution that some leading asset managers are considering includes a CIT that generates consistent income without an insurance guarantee. For example, building a laddered bond fund with a committed payout in which the fund is managed to pay out at a specific rate—one that may be adjusted over time. Creating a CIT version of this type of fund would not only provide significant cost savings but also allow asset managers to quickly launch the product and avoid all of the hurdles of a traditional mutual fund launch, such as registration and capital requirements.

403(b) Plans: Unlike 401(k) plans, 403(b) plans are prohibited from using CITs, with one exception: church plans [as defined in Internal Revenue Code Section 403(b)9]. Many investment firms and industry associations have been lobbying to allow CITs to be included in all 403(b) plans. There are two important reasons recordkeepers are pushing to include CITs in 403(b) plans. The first is cost savings. The second is consistency; that is, schools, hospitals and other nonprofits should all have access to the same investment vehicles as private sector employees. Especially given that many firms have either a 457 or 401(k) plan in addition to their 403(b), this change would enable consistent investment lineups across plans and open up an entirely new distribution channel for CITs.13 Asset managers continue to lobby to get these changes approved, and these changes could occur over the next three to five years.

Closing

CITs have grown significantly in the last decade. The initial increase in popularity and inflows was driven largely by an industrywide focus on lower fees and increased flexibility. Today, with personalized and tailored solutions in high demand, CITs will not only continue to grow, but the pace of growth will likely exceed that of the last five years. To take advantage of the positive secular trends affecting the DC market, leading asset managers should create a diverse set of products, vehicles and solutions, and include building an array of CITs to meet specific client demands for personalization at a low cost. As part of creating a robust CIT offering, asset managers should:

  • Invest in strategic partnerships with intermediaries to build custom CIT products (i.e., customized to their firm or team)
  • Work side by side with sponsors, intermediaries and trustees to create solutions customized to the plan
  • Align their solutions to capitalize on opportunities resulting from recent and evolving legislation (e.g., SECURE Act, 403(b) provisions, etc.)
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11 RLF 2020 SECURE Act Survey.
12 RLF 2020 Retirement Income Survey.
13 Rebecca Moore, “ICMA-RC Fighting for CIT Availability for 403(b)s,” PlanSponsor, September 18, 2019.

Legal Note

This information is provided for education purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.