Investing June 17, 2024

CITs Continue to Dominate in DC Plans, But Limitations Remain

Collective investment trusts are overtaking mutual funds in 401(k) plans, according to new research from Cerulli; however, barriers to adoption of CITs on investment menus remain.

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As collective investment trusts are becoming increasingly more popular in defined contribution plans, a new Cerulli report questions whether mutual funds will remain a competitive investment vehicle in the future.

While CITs are often overshadowed by their more well-known mutual fund counterparts, Cerulli argued in its new “The Cerulli Edge” report for Q2 that CITs have gained market share and are overtaking mutual funds in 401(k)s.  

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When considering the benefits of offering a CIT, as opposed to a mutual fund, 66% of respondents said they consider lower cost and fees as the most significant benefit, and 18% cited the ability to negotiate fees.

Adam Barnett, senior analyst at Cerulli, explained in the report that because CITs are available only to individual investors through DC plans, asset managers do not have to expend capital to market those funds to retail clients.

“This reduction in fees begins at the top and trickles down to participants, allowing for high-quality, low-cost-profile investment options,” he stated.

However, there are some downsides to CITs. For one, CITs have been excluded from 403(b) plans to the detriment of asset managers, plan sponsors and participants, according to Cerulli. Legislation that has passed in the U.S. House of Representatives and is pending in the Senate would authorize the use of CITs in 403(b) plans, and according to Cerulli, “the question now is not if this will pass, but when.”

It could take time before CITs are placed on 403(b) investment menus once the law is signed, but the Cerulli report pointed out that 403(b) plan sponsors will need to be educated about how CITs work, plan sponsors are not accustomed to these .

Asset managers also indicated in Cerulli’s survey that there is a lack of sufficient knowledge among advisers regarding CITs, as 91% of those surveyed regarded this lack of understanding as a significant or somewhat significant challenge to further CIT adoption. In addition, 94% of asset managers said plan sponsors and advisers having issues accessing clean and comparable data on CITs within databases poses a challenge to further adoption.

Data reported by PLANSPONSOR sister publication PLANADVISER this month shows that mutual funds are continuing to hold their own despite the rise of CITs, 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 PLANSPONSOR and PLANADVISER, is owned by ISS STOXX GmbH.

The adviser-sold market encompassed numerous plans managing smaller asset pools, unlike the consultant-driven market, which included fewer plans with substantial assets, the BrightScope report noted.

Because advisers are less familiar with CITs, they may have a harder time explaining the differences to who are considering adoption, Cerulli found. This may not be as much of an issue with mega 403(b) plans, as their national consultants have likely been selling CITs to their 401(k) clients for years, but for smaller, less advised plans, “lack of education likely will be a barrier to adoption,” the report stated.

With mutual funds, Cerulli found that they tend to have a stronger foothold in the micro and small plan segments because CITs’ investment minimums have often been too large for smaller plans to meet. According to SEI Investments, nearly 70% of asset managers enforce a minimum asset requirement on their CITs. As a result, it is important for plan sponsors to consider whether a minimum exists and what they can expect that threshold to be.

Cerulli predicts that mutual funds will remain a viable option for the smallest plans. While some micro-market recordkeepers, like Vestwell and Guideline, offer exchange-traded funds on their platforms, many of the more long-standing recordkeepers do not.

Also, plan sponsors and advisers without the scale to negotiate custom fee arrangements or access to cheaper CIT share classes may find that the cost difference between a mutual fund share class and a CIT share class is minimal or that the mutual fund is even cheaper.

Therefore, depending on the size of the plan in question, pursuing CITs may or may not make sense.

“With more than $19.5 trillion in assets, mutual funds are not going anywhere any time soon,” Barnett stated in the report. “As competition among investment vehicles ramps up, plenty of opportunities for mutual funds remain in the DC market. At the same time, asset managers that do not offer CITs as an investment vehicle must consider ways to materially lower expense ratios for their actively managed funds and specialty investment strategies to remain competitive.”

Opinions June 17, 2024

The Option of Total Retirement Outsourcing

Increasing plan complexity and fiduciary liability continue to steer employers toward this growing trend.

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Employers are searching for technology-based solutions to reduce the administrative burdens and complexity associated with managing multiple retirement plans.

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Brian Robb

Increased regulation and growth in lawsuits from participants have organizations wrestling with growing costs and accountability for their retirement plans. Total Retirement Outsourcing has emerged as a solution for employers looking to leverage their human resources staff, keep up with new regulations and compliance duties and simply gain more value from the dollars they spend on their retirement programs.

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TRO providers specialize in the administration of all qualified and nonqualified retirement plans sponsored by a particular organization, including both traditional and hybrid-designed defined benefit/pension plans, 401(k), 403(b) and 457(b) defined contribution plans, and nonqualified deferred compensation programs for highly compensated employees. The most sophisticated service providers also offer independent institutional investment advisory services, delivering an efficient solution for employers seeking optimum convenience.

Comingling retirement plan administration with investment advisory oversight could provide significant benefits, such as:

  • Portfolio alignment and fiduciary oversight throughout the process
  • A knowledgeable plan administration partner delivering access to technology and services
  • Annuity placement experts focused on plan sponsors’ goals
  • Integrated project management with a single point of contact
  • Coordinated employee education focused on retirement planning and long-term investing
  • Greater visibility into the value of the entire retirement program

How Does TRO Benefit Employers and Their Employees?

Retirement plan sponsors continue to shift plan administration to external service providers at a rapid rate.

According to the Callan Institute’s 2022 Defined Contribution Trends Survey, the total retirement outsourcing market is growing, with the share of plans outsourced increasing to 17% in 2022 from 13% in 2017.

The study also found that the most common reasons for outsourcing are to reduce costs, improve efficiency and free up internal resources.

With a TRO strategy, retirement plan sponsors and their participants benefit in several ways:

Consolidates Plan Administration

A typical HR department can spend more than half its time on routine retirement plan tasks, such as processing paperwork, answering participant questions and collecting and maintaining data. To reduce the amount of time HR spends on these tasks, many organizations engage an outside service provider to manage day-to-day administrative duties.

Since an integral part of TRO revolves around robust technology, the best platforms should provide optimum efficiency throughout the entire process, such as:

  • Single payroll feed to update all participant records across multiple plans, resulting in accurate, consistent and up-to-date data used in plan processing
  • Consolidated reporting to provide a holistic view of participant information, trust reports, performance reporting and other required management information
  • Combined nondiscrimination testing to help simplify the testing process
  • Merged benefit application process with one benefit application package customized to the needs of the retiring employee
  • Workflow management to assign and track internal tasks, issues and questions, and to communicate about projects in real time

The administration platform must also be flexible to adapt to organizational changes and evolving retirement plan offerings. With cyberthreats on the rise, it is paramount that strong security protocols are in place with any online system. To avoid fraud, the system should provide single sign-on access for plan participants, multi-level authentication and be reviewed and validated by an external cybersecurity auditor annually to ensure it continues to meet changing standards.

Eliminates the Need to Manage Multiple Vendors

TRADITIONAL SERVICE MODEL
Employers may work with several advisers and consultants which require them to act as the conduit for plan updates and communications. Despite the diligence of plan management, the dynamics of this administrative model invites communication and collaboration issues.

MODERN SERVICE MODEL
Alternatively, a modern TRO service model solves the employer’s coordination and communication dilemma by placing an external relationship manager over an experienced team of benefits professionals. This model creates administrative efficiencies while enabling employers to accomplish more with less effort.

Offers Employee Education, Tools and Access

Over the years, retirement plan participants have naturally become more financially aware and internet savvy. They expect employers to provide education and tools that assist them with making informed financial decisions. For these reasons, TRO providers must be able to offer participants online access to their personal data and statements, the ability to run multiple retirement plan scenarios, make investment elections, obtain benefit election packages, receive communication from their employer and more … all through single sign-on to a retirement portal from any device with an internet connection.

Although many participants rely on modern conveniences provided by an online portal, some may prefer a more personal touch when assistance is needed. In addition to online services, a TRO provider must be able to offer a service center staffed with representatives who are equipped to answer questions, help with website navigation and assist with forms or other paperwork.

Additional participant materials, whether online or in printed form, further reinforce the integration of multiple retirement plans. Enrollment materials and welcome packets, plan highlights, participant statements, benefit application kits and other communications can be consolidated to increase efficiency and deliver a unified message to the participant on the benefits offered within the retirement programs of the employer.

Delivers Maximum Flexibility and Convenience

Employers may move toward a fully integrated approach in stages or continue to use outside providers for certain critical facets of plan management. They may also wish to retain their independent actuary or investment adviser, or may want to participate in, or retain, certain communications and administration tasks. The TRO provider must offer the flexibility to collaborate with other providers and tailor its services to the organization’s needs.

An effective TRO provider must be able to offer:

  • An investment approach that accommodates full or partial use of outside investment advisers, in addition to its own investment advisory and investment management capabilities
  • Automated custodial, trust administration and benefit payment services that are integrated with the administrative systems used to maintain participant data and account information
  • Customized participant education that reflects the company’s culture and the desired messages from management
  • Proactive actuarial and compliance services to assist with financial management of the retirement programs, monitor and manage regulatory compliance and act as an extension of management staff to advise and recommend changes as needed to meet the company’s changing needs. If an independent consultant is retained, the TRO provider must be able to efficiently provide data and work as a team with those professionals to provide the needed services

Weigh the Benefits Before Making a Decision

Employers who outsource the administration of their retirement plans experience a reduction in the overall cost of communications, administrative paperwork and time spent working with multiple service providers—allowing them to focus on strategic business tasks.

These employers also experience an increase in employee satisfaction due to the enhanced communication capabilities offered by the plan’s outsourcing provider. Working with a TRO provider that offers flexibility in its services can produce measurable efficiencies and substantial return on investment to the company.

However, there are some risks associated with TRO, such as:

  • Some employers may feel uncertain because the service provider will be making decisions about the plan’s investments, recordkeeping and other administrative areas
  • Plan fees may increase due to expanded services that provide online services and conveniences for both the employer and employee
  • Potential conflicts of interest that could impact the plan’s investments or other decisions

Employers should be diligent when seeking to consolidate plan management service providers. However, with TRO in place, the organization’s lengthy list of retirement plan responsibilities becomes shorter. These employers also enjoy the confidence that comes from having experts handling the entire process from beginning to end while also delivering on employee expectations.


Brian Robb is senior vice president and sales leader at USI Consulting Group.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates.

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