Mutual funds continue to be the dominant investment vehicles selected by 401(k) plans, but plans' desires for lower fees and greater flexibility could expand the role of institutional products such as collective trusts, especially among plans with more than $250 million in assets, according to a report by Cerulli Associates.
Mutual funds accounted for 52.3% of all investment vehicles for plans of all sizes as of Dec. 31, 2011, according to Wednesday's Cerulli report. The next most popular investment vehicle was separate accounts, 13.3%; collective trusts, 12.5%; and insurance products, 12.2%.
The report was based on information from several sources, including the Labor Department and Plan Sponsor Council of America as well as Cerulli.
“The plans with assets of more than $250 million were most likely” to use or considering using institutional investment vehicles, Kevin Chisholm, a senior analyst at Cerulli, said in an interview. Lower fees and greater flexibility — such as adding or subtracting certain asset categories — are the primary reasons why 401(k) plan executives would favor switching from mutual funds.
The Cerulli report predicted that smaller plans — those with DC assets below $250 million — will continue to focus on mutual funds as the primary investment vehicle. Plans with up to $1 billion in DC assets also will favor mutual funds, “but institutional vehicles — mostly collective trust funds — will be used at higher rates than are currently used in plans,” the report said.
The largest plans, with more than $1 billion in assets, “are the most likely” to use collective trusts and separate accounts, the report said.
Among plans with more than $250 million in DC assets, Cerulli found that 33% used mutual funds, 22% used collective trusts and 15% used separate accounts the report said. Another 30% of plans used what Cerulli called a mixed approach — choosing the investment manager first and then choosing an investment vehicle.