James Martielli, head of investment solutions at Vanguard in Malvern, Pa., said index-based ETF strategies are increasingly adopted by advisers and individuals, but defined contribution plans and large institutions are increasing their use of collective investment trusts and using a core lineup of index products within the trust.
The essential features of ETFs, such as tax advantages and continuous trading, are useful for many investors but are not equally attractive for the longer-term horizon of DC plans, he said.
He said the ability to structure a CIT with a “core tier” composed of index-based funds that give broad, low-cost exposure to U.S. equities, non-U.S. equities and U.S. bonds at a lower cost than mutual funds has attracted retirement plan sponsors. Mr. Martielli said 67% of the plans Vanguard record keeps now offer CITs with a core tier of index-based funds, up from 44% 10 years ago.
As a firm, Vanguard is expanding access to collective investment trusts, he said, noting that the firm lowered the minimum for investments in a target-date fund CIT to $100 million from $250 million.
“And we’ve been early supporters of some bipartisan legislation to expand (CIT) access to 403(b) plans, which are predominantly non-profits, and we’re encouraged to see that’s included in the SECURE Act 2.0 bill,” Mr. Martielli said.
CITs typically have lower costs and more flexibility than the types of annuity contracts and mutual funds in which 403(b) plans are currently limited to investing in.
Looking beyond the expense ratio, Mr. Martielli said other nuanced differences are leading some plan sponsors to CITs rather than mutual funds.
“International equity funds, particularly ones that are directly invested, can benefit from a more favorable withholding tax treatment that, many times, can be greater than the basis-point differences in fees. And then we’re getting a lot of questions from clients about transparency in securities lending and who’s actually benefiting from the securities lending revenue and what sort of risks you’re taking,” he said.
Vanguard is the largest U.S. defined contribution index manager in P&I’s universe, with $1.42 trillion in indexed DC assets as of June 30, a 32.71% increase over the previous year. Mutual funds, which account for 61% of Vanguard’s total worldwide indexed assets, rose 27.1% to $3.8 trillion as of the year ended June 30. Vanguard has been the largest manager of indexed mutual fund assets since P&I’s survey began in 2006