CITs ‘Inch Past’ Mutual Funds to Become Lead Target-Date Investment Vehicle

Collective investment trusts, popular for defined contribution retirement plans, have been gaining ground on mutual funds in the target-date market for years. Now they have overtaken them as measured by total TDF assets, according to Morningstar data posted Thursday.

As of the end of June, CITs accounted for $1.9 trillion of the $3.8 trillion of total target-date assets, accounting for 50.5%, according to Morningstar. That shows CITs “inched past” mutual funds, which account for about 49.5% of TDF market share after leading in the TDF space since they were introduced in the 1990s.

This moment has been in the making for nearly a decade, with mutual funds steadily losing ground after holding 71% of the market in 2015. The trend “isn’t slowing,” according to the write-up from Megan Pacholok, a senior analyst at Morningstar.

“Target-date CITs have been capturing most of the target-date net flows since at least 2020,” she wrote. “Flows aren’t the only indicator of their success. Based on reported data, more than USD $22.6 billion in target-date mutual funds converted to CITs in 2023.”

Morningstar’s analysis included a breakdown of the five target-date series with the most CIT assets. They are:

Source: Morningstar

The rise of CITs does not indicate the end of the hold mutual funds have on qualified retirement plan investing, with Pacholok writing that “target-date mutual funds still hold a large part of the market.”

Mutual funds also still held a steady lead in overall 401(k) plan assets as of March 31, according to the Investment Company Institute. Of $7.8 trillion held in 401(k)s, mutual funds accounted for $5.1 trillion, or 65%.

CITs often offer lower fees for DC plans when compared to mutual funds, in part because they are not regulated by the Investment Company Act of 1940. CIT fees are negotiated with the plan providers and have provided cheaper fees for large plans for years, while also offering attractive pricing for plans further down market as the market has developed.

CITs are also overseen by the Office of the Comptroller of the Currency, not the Securities and Exchange Commission. Gary Gensler, chairman of the SEC, has made comments suggesting CITs are being reviewed to ensure they are subject to an appropriate amount of regulatory oversight—noting in May that that “rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, requirement for regular reporting on holdings to investors, or requirement for an independent board.”

There is no question, however, of CITs’ popularity among retirement plan fiduciaries and investment managers. After a steady lobbying effort by industry players, committees in both the House and Senate have passed bills to allow CITs to be used in 403(b) plans, which at the moment is not allowed. That would extend their use even further into nonprofit and other retirement plan investment menus.

Morningstar’s Pacholok also pointed out a “shadow side” to CITs: They are less transparent than mutual funds because they do not need to disclose their investment managers, their experience or if they have joined or left the investment strategy team.

“It’s impossible to assess a management team without this information,” she wrote.

Despite lack of regulatory requirement to do so, 88 out of 141 target-date CIT strategies disclose manager names within Morningstar’s database, according to the firm. Meanwhile, plan sponsors and their advisers, of course, are held to fiduciary standards under the Employee Retirement Income Security Act, and therefore are ultimately responsible for the investment options they select for participants.