Data and Research October 5, 2023

DCIO Firms Increase CIT Distribution to Sponsors of Smaller Plans

Demand for collective investment trusts is growing across retirement plan market segments, according to a survey of defined contribution investment-only asset managers.   

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Demand for collective investment trusts continues to increase among small and midsize plans, according to new research on defined contribution investment only distribution from Sway Research.

Specifically, demand is increasing in the less-than-$50 million retirement plan segment, the data showed. DCIO firms estimate that 22% of current CIT sales are generated from plans with less than $50 million in assets, with another 23% coming from plans holding between $50 million and $100 million in assets, according to the “State of DCIO Distribution: 2024—Key Benchmarks, Developing Trends, Winners and Outlook.”

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Sponsors of these smaller plans are interested in the CITs because they want to take advantage of lower fees and cost savings relative to mutual funds, which are subject to the Investment Advisers Act of 1940, says Chris Brown, co-founder of and principal in Sway Research.

“CITs bring down the cost of the operational side: There are fees involved in a ‘40 Act mutual fund that you don’t have in a CIT, so [plan sponsors] are able to strip out some of the operational fees,” he says.

Additionally, CITs carry lower fees because they are regulated by the Department of the Treasury’s Office of the Comptroller of the Currency—unlike mutual funds, which are regulated by the Securities and Exchange Commission, which requires regular registration statements and prospectuses.

Sway’s data showed the share of DCIO gross sales in CITs by plan size grew between 2019 and 2023.

The 2023 data showed:   

  • Plans with assets of at least $500 million accounted for 18% of gross sales in 2023, versus 56% in 2019;
  • Plans with assets between $100 million and $500 million comprised 36% of sales in 2023, compared with 30% in 2019;   
  • Plans with assets between $50 million and $100 million comprised 23% of transactions in 2023, compared with 10% in 2019; and
  • Plans with $50 million in assets or less accounted for 22% of sales in 2023, up from 4% of transactions in 2019.

Defined contribution investment only assets under management are projected to be $5.9 trillion by the end of 2023, up from $5.38 trillion at the end of last year but down from $6.38 trillion at the end of 2021, Sway data showed.

According to data from the Investment Company Institute and Brightscope, CITs are increasing in asset share across 401(k)plan segments, with Sway projecting 2023 figures.

The percent of 401(k) assets in CITs by plan size includes:


Plan size (assets)


2016


2019

(proj.)
2023

$1B or more

40%

52%

62%

$500M to $1B 

21%

28%

35%

$250M to $500M

12%

17%

22%

$100M to $250M

7%

11%

17%

$50M to $100M

5%

7%

12%

$10M to $50M

3%

7%

10%

$1M to $10M

3%

6%

9%

Source: Brightscope, ICI and Sway Research.

“The State of DCIO Distribution” is Sway Research’s annual benchmarking study on defined contribution investment only. The survey was in the field between July 25 and September 12.

Compliance October 4, 2023

ESOP Creation Deterred by Lack of Valuation Rules, Report Says

A report from Matrix Global Advisors found that ESOPs need clear rules on valuation, which SECURE 2.0 requires the DOL to provide.

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One of the key obstacles to the creation of employee stock ownership plans is the lack of clear rules from the Department of Labor on private stock valuation.

ESOPs are employer-sponsored, tax-advantaged and ERISA-governed plans that provide company shares as part of employee compensation.

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A report published by Matrix Global Advisors on Tuesday stated that regulatory uncertainty “has a chilling effect on investment and innovation” because it makes it difficult to “assess risk.” Without clear regulatory guidance on how private equity should be valued, ESOP sponsors rely on court judgments and DOL enforcement actions as guidance for stock appraisal.

In this context of ambiguity, ESOPs are vulnerable to lawsuits because there are no clear rules for pricing such stock. This increases costs and risks and deters potential ESOP sponsors, according to the report.

Alex Brill, a senior research fellow at the American Enterprise Institute and the author of the report, says, “I think the regulatory uncertainty around ESOP valuation is a significant impediment for the industry, the most pressing concern right now.”

Michael Kreps, a principal in Groom Law Group, explains that public stock can easily be valued because it has a market price. Private equity does not have that benefit, but the appraisal industry has its own standardized methods for determining prices.

Kreps says the lack of effective rules from the DOL leaves industry actors asking, “Will the regulators accept their methodologies” of appraisal? The challenge for ESOPs, Kreps continues, is that they need to figure out “what the DOL can live with.”

According to Kreps, the DOL proposed a valuation rule in 1998, but that process was abandoned. In the meantime, DOL has “preferred not to tell us” what methods should be used and instead has relied on an approach of “we know when we see it, and when we don’t like it, we will deal with it through litigation.” This approach has a “destabilizing” influence on ESOP sponsors, Kreps says.

He says a new rule from the DOL “needs to focus on substance. We need to move past procedure.” Kreps wants the DOL to describe how to value different interests, some of which can be difficult to appraise, such as “control and appreciation rights,” as well regulatory risks.

The SECURE 2.0 Act of 2022 requires the DOL to create regulations for ESOP valuation, but no deadline was set. Brill said he hopes for a proposal in early 2024, and Kreps adds employee ownership has been a high priority for the administration of President Joe Biden, but he is unsure of when to expect a proposal.

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