Lower fees, greater flexibility in investment management and less complexity in plan management are bolstering the growth of collective investment trust-based target-date funds, industry observers and providers agree.
Data on overall industry usage are patchy, but results from some prominent players illustrate the growth — and growth potential — of CIT target-date funds.
For example, Vanguard Group Inc., Malvern, Pa., had CIT-based target-date fund assets under management of $132.9 billion last year — nearly six times more than the $22.6 billion in AUM it held in such vehicles in 2011. Vanguard is the CIT target-date fund leader, and it's also the mutual fund target-date-fund leader, with $224.9 billion AUM last year — up more than 150% from the $89 billion AUM in 2011.
Over that same five-year period, surveys by Callan Associates Inc., show 30.6% of DC plans last year offered CIT target-date funds vs. 13.2% in 2011.
“Fees are a clear driver,” said Lori Lucas, Callan's Chicago-based executive vice president and defined contribution practice leader “Plan sponsors seeking to remove revenue-sharing are moving to collective trusts.”
CIT target-date funds have eroded the dominance of their mutual-fund-based brethren, according to Callan Associates surveys. Last year, 46.8% of respondents offered mutual fund-based target-date funds vs. 73.5% in 2011. Custom target-date funds attracted 17.1% last year vs. 11.3% in 2011.
For sponsors, “you have more control and you can add asset classes” with CIT-based target-date funds, added Winfield Evens, a partner at Aon Hewitt, Lincolnshire, Ill. “Collectives are typically more cost-effective.”
CIT strategies also have capitalized on overall target-date fund growth trends — most notably their increased use as qualified default investment alternatives and participants' desires to have a “do-it-for-me” approach to retirement investing, consultants and target-date fund providers said.
“In the last five years, they have appeared to gain in popularity,” said Jeff Holt, associate director of manager research at Morningstar Inc., Chicago, citing lower fees and providers' willingness to be flexible in CIT target-date pricing.
In many cases, a target-date fund provider will use the same underlying investments, same strategy and same glidepath in their CIT versions as in their mutual fund versions, Mr. Holt added.