Broader Industry Trends Further Boost CIT Usage

In addition to intermediaries’ accelerating adoption of CITs, there is a set of overarching industry trends that supports the case for continued CIT growth. Sponsors and participants are demanding more personalized retirement solutions that account for a participant’s broad financial picture.

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To build products that meet these demands, intermediaries are creating custom investment products and managed account offerings that are tailored to the sponsor’s and participant’s needs. CITs have proven to be one of the best investment vehicles for this personalized approach due to their pricing flexibility, short creation and launch time, and the ability to include investment types that cannot be included in a mutual fund (i.e., alternative investments, including real estate, commodities, hedge funds and private equity).

A Shift in Target Date Offerings

Since the Pension Protection Act of 2006, off-the-shelf target date mutual funds have dominated the DC space and become the most popular Qualified Default Investment Alternative (QDIA) option. However, driven by fee pressure from plan sponsors and increased demand for customization, asset managers are positioning cheaper (and often identical) CIT options alongside their standard mutual fund offerings and seeing significant uptake. As evidence of this trend, T. Rowe Price reported target date CIT products’ net inflows of $21.4 billion in 2018, while target date mutual funds had net outflows in 2017 and 2018 totaling $23 billion.7 Of course, the target date CIT trend is driven by factors other than just “cost,” such as the ability to tailor the investment to a plan or intermediary firm. And with the growing trend toward using custom investments in the target date slot, CITs are poised to be the target date vehicle of choice and see even more flows in the future. Figure 2 shows a comparison of the attributes of each type of target date vehicle.

Intermediaries have been at the forefront of this trend because creating a custom target date product allows them to demonstrate investment expertise through product creation, not just traditional investment selection. As the competition among intermediaries becomes more intense, an intermediary firm’s ability to customize investment solutions becomes an important differentiator. For asset managers, the opportunity lies in supporting intermediaries with a range of CITs that they can quickly deploy within these personalized solutions.

It’s important to note that the structure of these new vehicles are often complex: To date, they have been fund of funds and provide exposure to both active and passive investments as well as alternative investments. With these underlying structures, it is critical for asset managers to partner with a trustee that has deep expertise, years of experience and existing relationships to more efficiently create fund of funds with requested managers. Additionally, the sophistication of the trustee is important in that it will help asset managers identify best practices and potential pitfalls of these structures. For example, there are different accounting issues that arise with fund-of-funds offerings that an experienced CIT trustee will be able to navigate easily.

Managed Accounts

To move beyond the simple cost advantage of offering a CIT version of a target date mutual fund, retirement specialized intermediaries are also using CITs to build custom managed account solutions. Research8 shows better savings rates and asset allocation among individuals who participate in these solutions. Advisory firms such as CAPTRUST and Resources Investment Advisors are partnering with service providers like Morningstar to create white-labeled managed account solutions. Essentially, the intermediary firm builds investment portfolios of CITs, and serves as the investment fiduciary on the investment selection and portfolio construction. The managed account provider then acts as the fiduciary for the portfolio assignment. And, of course, a recordkeeper must build the operational and process “pipes” to facilitate this offering (i.e., allow the participant data to flow securely back and forth). Currently, only 11% of recordkeepers support advisor managed accounts, but a massive 44% are planning to offer them.9

Figure 2 | Comparison of types of target date vehicle attributes

Off the shelf mutual funds, off the shelf CITs and Custom CITs

Source: DCIIA and Wellington

For the advisor, the appeal of using custom CITs instead of ’40 Act funds in managed accounts is primarily the low cost. This allows them to keep the investment solution competitive even with an advisory fee included. Secondly, CITs give advisors the ability to include different asset classes than ’40 Act regulations allow in mutual funds. With advisors working on the front line to engage participants and affect participant behavior, we expect the combination of CITs and personalized investment solutions (e.g., managed accounts) to gain popularity over the next five years.

At the larger end of the market, national consultants are looking not only to disrupt the target date space, but also to take on even more of the investment responsibility. Increasingly, large and mega plans are seeking OCIO services for their retirement plans. Defined contribution remains one of the fastest-growing segments for OCIO services. According to Pensions & Investments, DC mandates for OCIO providers grew 44.2% to $164 billion between March 2017 and March 2018.10 Custom CIT solutions play a critical role in these OCIO solutions since consultants are looking for a combination of low cost, flexibility, customization and high-performing products for their offerings.

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7 Robert Steyer, “CIT target-date assets surging as mutual funds hit by outflows,” Pensions & Investments, June 24, 2019.
8 “The Impact of Managed Accounts on Participant Savings and Investment Decisions,” Morningstar, January 22, 2019.
9 RLF 2019 Managed Account Survey.
10 Danielle Walker, “More endowments, DC plans make OCIO jump,” Pensions & Investments, June 24, 2019.

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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.