Morningstar Direct has tracked CITs taking an ever-larger piece of target-date series assets compared to mutual fund-based target-date series.
According to the latest available data, CITs accounted for $1.48 trillion in target date assets in 2021, or 45% of the market, compared to mutual-fund based target assets of $1.79 trillion. CITs represented 43% of the target-date market in 2020, and their percentage has gained every year since 2014 when they accounted for 18%.
"Collective investment trusts are on pace to overtake mutual funds as the most popular target-date vehicle in the coming years," a March 2022 Morningstar report said. "In 2021, CITs accounted for 86% of target-date strategy net inflows." In 2021, among net contributions to target-funds, CITs added $146 billion while mutual funds added $24 billion.
With numbers like these, it's no surprise that 403(b) plans want to offer CITs. For now, 403(b) plans remain restricted to offering mutual funds and annuity products.
Consultants and providers said there is clear pent-up demand by 403(b) plan sponsors for CITs.
"We'll see significant investments once they are finally approved," said David Swallow, the New York-based senior managing director and head of consultant relations for TIAA-CREF. His organization has been talking to consultants for 18 to 24 months about CITs.
"Consultants are looking to add value to their clients," he said. "Many are chomping at the bit to have this conversation."
Sponsors who are using CITs in other DC plans, such as 401(a) plans, would be the most likely to provide CITs to the 403(b) plans, said Mr. Swallow, who declined to predict when Congress might act.
The prospect of CITs costing less than mutual funds makes them attractive to sponsors because "lower fees will mitigate litigation risk," said Michael Volo, the Boston-based principal for CAPTRUST Financial Advisors. "Regardless of the segment in the non-profit world, everybody is focused on fees," he said.
Mr. Volo said 403(b) plans will face the same challenges experienced by 401(k) plans and other DC plans in educating participants to overcome such concerns about CITs, such as the lack of stock-market ticker symbols for mutual funds and stocks.
Today's CITs are more attractive than their predecessors. For example, they now offer more investments, greater transparency through improved data reporting, plus fund fact sheets and daily valuations.
Despite the changes in CITs, 403(b) plans "will have the same learning curve as the 401(k) plans," said Mr. Volo, adding that 403(b) sponsors will be as deliberate in pursuing this opportunity as they have been in adding new plan features. "They won't leap into CITs."