CIT target-date funds enjoying steady growth

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.

CIT target-date funds have been most popular with larger plans, thanks to their ability to leverage asset size into negotiating lower fees. “More plan assets equal better pricing,” Mr. Holt said. “In some cases, multibillion-dollar plans appear to get more than a 20-basis-point discount going with a CIT over the mutual fund.”

However, consultants and industry members noted that target-date fund providers also look at the size — or potential size — of a sponsor's target-date investments and plan-management strategy in offering CIT target-date funds.

For example, a plan with a target-date fund QDIA and a company match presents an attractive opportunity for providers of CIT target-date funds because they expect significant asset growth, Mr. Evens said. A plan might start with a mutual-fund target-date portfolio, but as assets grow, plan executives are more willing to examine a CIT approach.

Among Aon Hewitt's record-keeping clients offering target-date funds, 60% of assets are in CITs, 36% in separately managed accounts or custom funds and only 4% in mutual funds.

CIT target-date funds have become more accessible to sponsors partly because providers are more willing to negotiate the size of asset minimums. “Sponsors are free to ask,” Mr. Evens said.

The asset minimums set by providers “can be flexible if there are indications there will be greater (asset) flows” into target-date investing, added Ms. Lucas of Callan Associates.

Vanguard attributes the rise of CIT target-date funds to “increasing fee sensitivity on the part of sponsors and participants,” said Kevin Jestice, a principal and head of institutional investors' services. “More sponsors have the scale for fee negotiations in the trust space.”

Among Vanguard clients, “an increasing percentage” of current CIT target-date fund clients had switched from mutual-fund target-date funds due to rising assets. And as plans reduce or eliminate revenue-sharing and shift to a per-person administrative fee model, CIT target-date funds, like other CIT funds, become more attractive, Mr. Jestice said.

Mr. Jestice said the underlying investments — all are passively managed — in Vanguard's CIT-based target-date funds are the same as those in Vanguard's mutual fund-based target-date funds.

T. Rowe Price Group Inc., Baltimore, is the third-largest CIT target-date provider with $34.2 billion in assets as of March 31, 22% higher than the $26.7 billion for the year-ago period. The company also is the third-largest provider of mutual fund target-date funds, with AUM of $138.5 billion as of March 31.

Keith Lewis, T. Rowe Price's head of global investment services-Americas, said the CIT approach has benefited from sponsors' desires to remove revenue-sharing investments from DC fund lineups. “There has been a movement to separate investment expenses from record-keeping expenses,” Mr. Lewis said. Collective investment trusts “make it simple for this bifurcation to occur.”

Mr. Lewis acknowledged some sponsors remain uncomfortable with CITs because, unlike mutual funds, there's no daily ticker symbol for participants to consult. However, like other industry members have noted, Mr. Lewis said the improved communication and education about CITs for sponsors and participants have increased acceptance.

Mr. Lewis added that providers also have lowered asset minimums over time, enabling sponsors to at least consider a CIT approach. For T. Rowe Price, the minimum is $50 million in target-date assets. “It has come down a little” over the years, he said. The key, he added, is target-date fund asset size rather than total plan asset size.

T. Rowe Price offers two types of CIT target-date series — one with primarily actively managed underlying investments and one with a blend of active and passive investments.

Charles Schwab & Co. has enjoyed steady growth in its CIT target-date funds, thanks in part to its emphasis on open architecture for underlying investments, said Jake Gilliam, senior multiasset class portfolio strategist for target-date funds at Schwab.

Mr. Gilliam, who is based in Cleveland, Ohio, said his firm's CIT business was aided by publication of target-fund tips by the Department of Labor in February 2013 encouraging sponsors to explore the open-architecture funds.

By year-end 2015, Schwab's two CIT-based target-date funds had combined AUM of $11.1 billion vs. $4.8 billion in 2011. (Mutual fund target-date funds grew to $3.2 billion from $1.3 billion during the same period.)

At Fidelity Investments, Boston, mutual fund target-date series AUM outnumbers the CIT series by a wide margin — $181.8 billion for the former vs. $13.9 billion for the latter, according to year-end 2015 data compiled by Morningstar.

The CIT strategies are most often used by Fidelity's larger clients, said Matthew Jensen, Fidelity's director of target-date strategies. “For most institutional investors, collective investment trusts aren't new,” Mr. Jensen said. “They are used to them.”

Fidelity offers two CIT-based target-date portfolios — a passively managed one whose underlying investments match those of a Fidelity mutual-fund based target-date series and a CIT series that combines actively and passively managed underlying investments. Sponsors generally need total DC plan assets of $200 million to be eligible for a CIT target-date fund.

The second-largest provider of CIT-target date funds is BlackRock Inc., New York, with $78.8 billion in AUM last year, according to Morningstar. BlackRock's mutual fund-based target-date fund AUM was $7.9 billion.

“Since the Pension Protection Act (of 2006), growth has been fairly substantial,” said Matthew O'Hara, managing director and global head of investment research for BlackRock's lifetime asset allocation group. The law was the catalyst for target-date funds becoming the dominant QDIA.