Future of 401(k) Market Lies with Collective Trusts

Industry leader SEI recently concluded in a white paper that collective investment trusts (CITs) are becoming more popular in the defined-contribution retirement market. In the first quarter of 2008 alone, 63 new collective trusts were launched, and from 2004 to 2007 CIT assets actually tripled.

While CITs share similar characteristics of mutual funds, they are an institutional-only product that combines assets from multiple retirement plans into a single portfolio. Best known for their cost effectiveness and lower fees – which can most likely attributed to their simple structure and regulatory status – CITs are exempt from SEC registration as well as from the 1940 Investment Company Act.

The report indicated that CITs may be an underestimated investment opportunity, and in the wake of the Pension Protection Act of 2006, many suspect they are in line for even more growth. This is because of an expected increase in retirement plan participation as well as a portion of the Act that requires sponsors to provide lower-cost options.

Based on recent trends, the report concluded, "It is clear that asset managers will need CIT capabilities to compete in the 401(k) market going forward."

CITs were found in 41% of defined contribution plans in 2006, versus 32% of plans in 2003. Retail mutual funds dropped during the same period from 65% to 54%.

"CITs are gaining momentum because they fit two of the major trends affecting plan sponsors," said Phil Masterson, managing director, solutions, for SEI's investment manager services division. "With investors becoming more outcome-oriented, plan sponsors want to be able to offer defined-contribution solutions as robust as those on the defined-benefit side. At the same time, public policy and litigation are increasing the scrutiny of plan costs and fees, pushing plan sponsors toward lower-cost solutions."