Introduction

Collective Investment Trusts (CITs) have become an important tool in the Defined Contribution (DC) market largely because of their low cost and ability to be customized, two characteristics that satisfy the needs of DC plans.

This alignment has led to a significant increase in the development and use of CITs in recent years. However, prior years’ growth just may be the tip of the iceberg, and several developments promise to further increase the demand for CITs. In the fourth brief of our four-part series, developed in partnership with the Retirement Leadership Forum (RLF), we’ll explore:

  • Broader industry trends boosting CIT usage
  • How the changing intermediary landscape is driving new CIT opportunities
  • New product development opportunities
  • Future factors that will further increase CIT adoption

Changes in Intermediary Landscape Drive New CIT Product Development Opportunity

Flows to CITs have increased steadily over recent years, and industry assets more than tripled in the 10 years ending in 2018, climbing from $896 billion in 20081to $3.1 trillion by the end of 2018.2Although CITs are still only a fraction of the total assets in the DC plans compared to mutual funds, with the ongoing changes in the broader intermediary landscape (as well as within each segment), they appear to be poised for continued growth.

Despite CITs’ significant growth, the vehicle’s utilization is still most prevalent in the large end of the DC market where national consultants3—who, as of 2019, advise nearly $3.5 trillion of the $8 trillion in DC assets4—are increasingly pushing large-plan sponsors toward CITs. In this segment, the percentage of plan sponsors using CITs in their plans has increased from 44% in 2011 to 75% in 2019.5 CITs offer consultants the opportunity to create customized solutions (i.e., white-labeled investment options), at a lower cost than a mutual fund while still providing many of the operational benefits (e.g., a daily NAV, fund fact sheets, etc.). However, having had success and growth in the large end, national consultants have started working with smaller plans and applying their investment expertise in this market. According to asset managers interviewed for this paper, national consultants are starting to work with plans as small as $50 million in assets, and as they do this, they’re bringing institutional investment solutions, previously only available to the largest plans, to the masses.

As consultants move from the larger end to the mid-market, they find themselves playing against a set of rapidly growing distribution powerhouses: the scaled retirement advisory firms (“aggregator firms”). Over the past five to 10 years, this group of roughly 15 leading benefits and RIA firms has built specialty retirement practices, and through continued acquisitions, has grown to advise more than $1.4 trillion in DC retirement assets (Figure 1). At the start of the year, we had expected to see record levels of acquisition activity continue since aggregators had planned to acquire, on average, four retirement-specialized firms by the end of 2020.6 Now, with the global COVID-19 pandemic changing the course of many businesses, most aggregator firms are moving forward with their acquisition plans but report being “more selective” about the firms they are willing to bring on board.

In the past, these firms set themselves apart from the traditional wirehouse brokers with lower fees, larger fund selection and a willingness to take on full fiduciary responsibility. In today’s competitive market, in order to remain a step ahead of the wirehouses and put themselves on a level playing field with the national consultants, aggregator firms are adding custom investment products to their service offerings. CITs are at the center of these innovations in that they allow the aggregator firms to negotiate relationship pricing and build their own white-labeled portfolios for which the firms act as 3(38) fiduciaries (i.e., a fiduciary with investment discretion).

And, as aggregator firms continue to gain market share in the mid-market, they are also moving upstream and beginning to serve large- and even mega-plan sponsors. While they may not have the established brands like the national consultants, aggregators also look to use custom CITs to demonstrate their industry and institutional investment expertise and improve regional and national brand awareness.

Figure 1 | Retirement opportunity by firm type

ability to deliver customization and flexibility compared to expected future growth of plan sales

Source: Wise Rhino Group, RLF 2019 Recordkeeper Sales and Retention Survey

Heading further down market, even the traditional wirehouses have begun to tie part of their value proposition to CITs. Over the last three to four years, with the emergence of new fiduciary standards, leading wirehouses have launched “black box” 3(38) offerings for generalist advisors with a set list of “best-in-class” investment options. Many of these firms use CITs as the core investment vehicles to gain the best possible pricing for clients. Interestingly, these 3(38) models were designed to put guardrails in place for the generalist advisor but have also gained some traction with specialist advisor teams at wirehouses that want a scalable solution for smaller clients.

Either way, asset managers are positioning their CIT offerings to gain acceptance in the smaller-plan market. One manager interviewed for this report, in an effort to increase CIT usage among the generalists at wirehouses, recently removed all minimum investment requirements from their CITs and have begun training their retail sales team (who broadly cover wirehouses) on the benefits of CIT structures.

Read the next section
1 Ed McCarthy, “Momentum Growing for Collective Investment Trusts in DC Plans,” WealthManagement.com, May 11, 2016.
2 Gregg Zimmerman, “Collective Investment Trusts (CITs) – Not Just For the Large Plan Market!” BPAS, March 7, 2019.
3 National consultants include firms like Mercer, AON, WTW, etc.
4 Wise Rhino Group and RLF Research.
5 “2020 Defined Contribution Trends Survey,” Callan Institute.
Wise Rhino Group and RLF Research.

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.