CIT Assets Expected to Surpass Mutual Fund Assets in TDFs in 2024, per Morningstar

Target-date-fund collective investment trusts continue to accumulate assets, finds Morningstar in its target-date strategy landscape report.  

Target-date funds collected roughly $156 billion in new assets in 2023 via flows and investment growth—67% of which went to collective investment trust structures, according to annual data from Morningstar. Total assets in TDFs hit $3.5 trillion last year.

CITs accounted for 49% of TDF assets at the end of last year, and the investment structure is expected to overtake mutual funds as the most popular target-date vehicle by the end of this year, according to Morningstar’s “Target-Date Strategy Landscape Report.”

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CITs will “likely be around 51%” of total target-date strategy assets at the close of 2024, says Megan Pacholok, a senior analyst of manager research at Morningstar and the lead author of the report, depending “on the way the market moves.”

In addition to the growing concentration of TDF assets in CITs, Morningstar reported that there is concentration of the TDF business with a small number of asset managers. The five largest TDF managers in 2023 managed about 80% of the market, and the 10 largest firms accounted for about 94%, according to the report.

The growing use of CITs in TDFs is one factor that drove down the asset-weighted expense ratio for the funds to 0.30% in 2023 from 0.32% a year earlier. Investor demand for low-cost funds resulted in funds in the lowest quintile of expense ratios experiencing inflows, while the other four quintiles had net outflows, the firm’s research showed.

The increased assets to CITs in TDF strategies “could give plan sponsors more access to lower-cost options,” explains Pacholok. While “CITs are pretty dominant in larger plans with larger plan sponsors, if they become more and more common, we can see it moving down-market” to mid- or smaller-size plans and affect plan fees, she says.  

“We think that this momentum will continue,” Pacholok adds. “Because CIT and mutual [fund] TDF assets flow were relatively close at the end of 2023, it makes sense that they would become more popular at the end of 2024.”

For the last five years, the asset flow into CITs has increased. Allocations to TDFs in CITs rose at a rate of “about” 2% of market share, each year, Pacholok adds. In 2019, TDF allocations to CITs were 40% of the total market share, according to Morningstar data.

Among the largest TDF manager firms, the mix of CIT and mutual fund offerings varied. “Most of Vanguard’s, T. Rowe Price’s, and BlackRock’s target-date assets were in CITs; most of Fidelity’s and American Funds’ were in mutual funds,” according to the report.

Vanguard had the largest inflows to its TDFs in 2023 at $44 billion. It has collected the most inflows every year but one since 2008, Morningstar reported.

Regarding fund construction, Morningstar found that providers are offering products in multiple series using the same glide paths, but different kinds of underlying funds. The report stated long-term performance of TDFs “are largely similar to one another,” whether built with all active funds, all passive funds or a blend of the two.

For the report, Morningstar gathered the data on mutual fund and CIT TDFs from its proprietary database. The report’s TDF assets inflow data are as of year-end 2023.

Pension Risk Transfer Premiums Hit $12.7B In Q4 2023

Following two record years for PRT transactions, LIMRA expects the trajectory to continue for the rest of 2024.

Pension risk transfer premiums totaled $12.7 billion in the fourth quarter of 2023, according to research from LIMRA, following two record years for PRT transactions. LIMRA expects the trajectory of PRT transactions to continue for the rest of the year.

LIMRA, an industry association and education group that conducts research on insurance and income topics, this week published the results of its U.S. group annuity risk transfer sales survey.

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Heightened interest rates in recent years have decreased pension plan liabilities. Combined with strong investment returns boosting pension assets, the funded status of many corporate defined benefit plans in the U.S. have surpluses, with a number of pension trackers finding that many corporate plans are more than 100% funded. 

This has led many plan sponsors to consider offloading their pension liabilities to insurers and even to take other approaches. Earlier this year, Eastman Kodak announced it would close its internal investment office and transfer the assets of its overfunded pension plan to outsourced chief investment officer provider NEPC. These factors have led to a record number of plans sponsors transferring their pension liabilities to insurers, which then become responsible for making payments to a plan’s retirees.

The premiums in PRT transactions in Q4 2023 was 53% higher than during the same period in 2022, while the number of transactions—296 was 26% higher year over year.

In 2023, there were a total of 850 PRT contracts for the entire year. In total, PRT sales in 2023 reached $45.8 billion, the second highest annual sales figure since LIMRA began tracking PRT data; in 2022, PRT transactions totaled $48.3 billion.

“Fourth quarter PRT sales historically tend to be elevated, and we saw this again in 2023,” wrote Keith Golembiewski, LIMRA’s head of annuity research, in the survey report. “Plan sponsors often want to close the deal before the end of the year to remove some of the pension risk off their books. …  We continue to see a record-level number of deals, suggesting broader awareness and interest in these contracts. LIMRA expects this trajectory to continue with 2024 PRT sales results similar to the results seen 2022 and 2023.”

Other findings from the survey include:

  • In Q4 2023, $12.5 billion in single-premium buyout sales occurred, up 73% from the same period in 2022;
  • Buyout sales declined 14% from 2022 to $41.3 billion in 2023, compared to the previous year; and
  • There were 763 buyout contracts in 2023, 36% higher than 2022.

Several large PRT transactions have already closed in the year’s first quarter. In February, Shell USA Inc. closed a $4.9 billion deal with Prudential Financial for 21,500 retirees. In March, Verizon announced a $5.9 billion deal with Prudential and RGA Insurance, offloading liabilities for 56,000 retirees.

Still, PRT contracts have come under increased scrutiny. This year, plaintiffs representing retirees of Lockheed Martin and AT&T have sued the respective companies for choosing Athene Annuity and Life Co. as the insurer for their pension risk transfers.

The plaintiffs in these lawsuits accuse Athene of being a risky insurer, alleging that the choice was not made according to the Department of Labor’s IB 95-1, which regulates how a defined benefit plan chooses an annuity provider.

Separately, the DOL is expected to issue a report to Congress soon on the results of hearings and a review of IB 95-1, required by the SECURE 2.0 Act of 2022. The report was due by the end of 2023.

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