The usage of defined contribution plans and collective investment trusts is growing quickly, resulting in a big impact on the ways that pension holders invest for the future, according to research released by SEI.

The paper, titled Getting Ahead of the CIT Boom: Aligning Capabilities to Capture DC Market Share, shows that overall DC market assets reached $4.6 trillion in the third quarter of 2011, up 28% from the lows of the 2008 market crash.

This market is composed of 401(k), 403(b), section 457, private non-401(k), and Federal Thrift Savings plan assets.

Mutual funds remain the most popular investment vehicle in this sector, accounting for roughly 55% of the total market. However, the CIT shares in the market have doubled over the past years to reach 10% in 2011. Meanwhile, The number of CIT portfolios tracked by Morningstar from mid-year 2006 to mid-year 2011 increased by 55%. CIT transactions conducted through the National Securities Clearing Corporation increased from 1.05 million in 2008 to more than 1.60 million in 2011. In the same period, trading volume grew 160% from $27 billion to approximately $71 billion

The growing usage of collective investment trusts is significant for a lot of reasons, according to Joel Lieb, managing director for SEI. It means that pension holders are looking for more freedom and customization options with their retirement plans, and that plan providers are starting to respond to this demand. Plans are also getting more aggressive shopping for cheaper investment products and looking to cut fees wherever they can.

Pension plans that want to tap into the demand for CITs need to start enhancing their services now, Lieb says. They need to align their sales force to the burgeoning needs of this product sector and need to make CITs more accessible on their platforms. They also need to bolster their reporting capabilities to address the nuances of these products. Finally, they need to invest in plenty of robust education for employees, advisors and customers.

The trend also means that are pension participants are open to experimenting with new ideas in their investment, like allocating more money into target date funds. According to the paper, target date funds held $247 billion of assets in DC plans in the third quarter of 2011.

According to Lieb, there are some advantages to these funds. Because these funds are aimed for a specific date in the future, there is little need for daily liquidity or even calculating a daily net asset value. This cuts costs on reporting and administration charges, but more importantly it allows for more creative in investing.

For example, using target date funds allow pensioners to get greater exposure to various hedging strategies not regularly offered in normal mutual funds.

“Once you back away from the daily liquidity component, you can start introducing real estate and private equity—there are a lot of assets that you can bring in,” Lieb told Money Management Executive. “You can have true absolute return.”


Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.