CIT target-date assets surging as mutual funds hit by outflows

Though some target-date managers are seeing net outflows from their mutual fund-based products, they are counting on their collective investment trust-based target-date businesses to pick up the slack.

T. Rowe Price Group Inc., Fidelity Investments and Principal Financial Inc. each saw mutual fund target-date fund assets decline between 2017 and 2018 while their CIT target-date businesses advanced, according to data compiled by Morningstar Inc.

The target-date managers are capitalizing on growing interest among plan sponsors for CITs, which boast lower costs, greater flexibility and fewer regulatory/administrative requirements.

"We typically see 70% of inflows flowing into DC plans going to the target-date funds," said James Veneruso, a Summit, N.J.-based senior vice president and defined contribution consultant for Callan LLC, referring to the overall target- date market. He said participants and sponsors have become more comfortable with CITs, which don't trade on the stock market like mutual funds.

"CIT fact sheets have come a long way in the past decade," Mr. Veneruso said. "They now look almost identical to the mutual fund fact sheets investors are used to seeing. There is also a shift where few get their quotes or price information from newspapers and most likely are using their plan website as a source of information."

Providers also have made their CIT target-date series more accessible to small- and midsized DC plans, enabling them to participate alongside their larger brethren.

"Some managers now waive minimums," Mr. Veneruso said. "Lower minimums are increasingly becoming more common, so the $150 million (for target-date assets) might be stale at this point. Plans see more substantial savings as their target-date fund assets grow and they become eligible for cheaper classes of the CITs."

To qualify for T. Rowe Price's CIT target-date series, a plan needs a minimum of $20 million in target-date assets, reduced from $50 million in 2017. This enables the firm to serve "a wider range of clients," said Joseph F. Martel, multiasset portfolio specialist for the Baltimore-based firm.

T. Rowe Price had $21.4 billion in net inflows into its CIT-based target-date business last year, according to Morningstar. Among its mutual fund target-date series, T. Rowe Price had net outflows in 2017 and 2018 totaling $23 billion.

Last year "we had $20.5 billion in transfers from mutual funds to other portfolios, including trusts and separately managed accounts," Mr. Martel said. "The majority of these transfers were related to target dates. That's why looking only at mutual fund flows is not representative of our target-date business."

Because CITs — unlike mutual funds — are exempt from SEC registration, they don't have to issue prospectuses, proxies and statements of additional information, Mr. Martel said. CITs are regulated by the U.S. Office of the Comptroller of the Currency or a state banking regulator, and the CIT's declaration of trust acts in a similar fashion to a mutual fund prospectus, Mr. Martel said.

The CIT structure "can result in lower compliance, administrative and other costs associated with a similar mutual fund," he said. "These cost savings can be passed on to plan participants."

His company offers three CIT target-date series, including the T. Rowe Price Retirement Trusts. It has "the same portfolio management team, glidepath, subasset-class exposure, tactical allocation overlay and underlying investments" as the mutual fund-based T. Rowe Price Retirement Funds target-date series, he said.

Pricing depends on various factors such as total assets. As an illustration, the lowest fee class for the CIT-based target-date series is 32 basis points across all years, Mr. Martel said. For comparable mutual fund-based series, fees run 38 to 59 basis points, depending on target-date years, he said. The Retirement Trusts series is the most popular of the three CIT-based target-date series. The others don't have corresponding mutual fund versions.

Tracking assets of CIT target-date funds vs. their mutual fund peers is tricky for Morningstar, which annually reviews target-date trends, said Jeff Holt, a Morningstar director and co-author of the firm's recent report, "2019 Target-Date Fund Landscape."

Morningstar uses formal financial reports for the mutual fund target-date series, but it makes estimates for CIT target date funds based on information from the providers. "Morningstar's CIT database may not capture every target-date CIT offering," the report said.

Morningstar estimated that overall CIT target-date assets rose to $662.4 billion as of Dec. 31 vs. $633.1 billion a year earlier, according to data from the 23 largest target-date managers, most of which also offer CIT target-date series. Mutual fund target-date assets slipped to $1.055 trillion from $1.071 trillion.

The Morningstar report excluded separate accounts and custom target-date funds; its mutual fund data incorporates taxable, tax-exempt, institutional and individual assets.

Another major player experiencing mutual fund-target date outflows is Fidelity Investments, Boston. In each year from 2014 through 2018, more money went out than in, for an aggregate outflow of $16.9 billion, according to Morningstar. However, Fidelity told Morningstar that its CIT-based target-date business had a net inflow of $7.6 billion in 2018.

Fidelity and T. Rowe Price were among the handful of firms for which Morningstar requested 2018 CIT target-date inflow/outflow data, said Mr. Holt, adding that this was the first time Morningstar made such a request.

Adam Banker, a Fidelity spokesman, declined to comment on his company's target-date strategy or performance.

Morningstar data shows CITs can soften the blow of declining mutual fund target-date assets among managers.

Fidelity's mutual fund target-date assets dropped to $210.7 billion at the end of 2018 from $227.5 billion in 2017, according to Morningstar, which incorporates asset flows and market-driven gains or losses in these calculations. Fidelity's CIT target-date assets — reflecting market activity — rose to $33.5 billion from $29.7 billion during this period.

For T. Rowe Price, its mutual fund-based target date assets fell to $142.3 billion last year from $165.6 billion in 2017, including market activity. Its CIT business climbed to $79.2 billion in assets from $58.9 billion during this period.

Principal Financial, Des Moines, Iowa, experienced outflows from its mutual fund-based target-date series in four of the past five years, including $3.5 billion last year and $3.2 billion in 2017, according to Morningstar.

When market activity is factored in, Principal's mutual fund target-date business reported assets of $20.8 billion last year vs. $26.4 billion in 2017, according to Morningstar. However, Principal's CIT target-date business had $35.5 billion last year vs. $34.5 billion in 2017. (CIT flow data was not available.)

Assets in Principal's CIT target-date series overtook its mutual fund target-date assets three years ago, said Timothy Hill, executive director, U.S. client group, at Principal Global Investors. He attributed the growth primarily to greater "fee consciousness" among sponsors. "They liked the multimanager approach and they liked the better fees," he said.

Principal's CIT target-date series charges 29 basis points for each of its dated funds. Fees for a comparable Principal mutual fund target-date series range from 37 to 42 basis points depending on vintage.

Principal began offering a CIT target-date series in 2009, aiming for plans with $100 million in total assets. Principal now offers its CIT product to smaller plans and even startups. "Considering Principal's focus on small- and midsize businesses, along with market demand for the solution, we removed the minimum shortly after the fund was started to allow flexibility to both clients and advisers," Mr. Hill said.