Victory Capital Management, the asset management arm of KeyCorp's KeyBank, says it is positioned to quickly expand the assets it manages in collective investment trusts, or CITs, for defined contribution plans, but the effort will not lack challenges.
"We will be doubling assets in the defined contribution world over the next couple of years, I hope," said John Kutz, managing director, retirement plan services at Victory.
The asset manager recently had $3 billion under management in what it refers to as collective trust funds. About 70% of the total is in defined benefit plans; the rest, in defined contribution plans, according to the company.
Demand for CITs would have to significantly strengthen in order for Victory's assets to double. In 2009, the company developed about half as much new business as in 2008, as plan sponsors waited out the poor economy, Kutz said.
"Plan sponsors over the last 12 months or so have been reluctant to make a lot of changes to their menus," he said. "But we're starting to see the ice break up a little bit and would like to think 2010 will be similar to 2008 in terms of asset growth."
The market for defined contribution plans moves slowly; plan sponsors routinely take six months or a year to make changes in their product menus. But Victory has laid the groundwork for growth, Kutz said, including rolling out four investing styles last year: large-cap growth, mid-cap value and international small-cap and large-cap strategies.
Though their growth was blunted by the recession, collective investment trusts have been gaining traction in the defined contribution market for several years.
A key point in their favor is price, said Denise Valentine, a senior analyst at Aite Group LLC. "It's just less expensive to have a 401(k) with collective investment trusts as opposed to mutual funds," she said.
Like mutual funds, CITs invest in stocks, bonds and other securities. But they are intended solely to be retirement funds. CITs have long been a feature of many defined benefit plans, but assets within defined contribution plans now have the momentum.
CIT assets within such plans reached $800 billion in 2009, up from $236 billion five years earlier, according to Morningstar. CITs can cost up to 25% less than mutual funds, a point that appeals to plan sponsors that want to avoid lawsuits over expensive investment options within their retirement plans. "Plan sponsors want solid risk-adjusted performance but at a reasonable price," Kutz said.
The products are able to keep costs low because they operate under a lighter regulatory burden than do mutual funds. They do not have to make Securities and Exchange Commission filings, for instance, or deal with requirements such as mandatory distributions, Valentine noted.
What is more, they can easily be custom-built according to plan sponsors' needs, she added. CITs' growth was also spurred by the Pension Protection Act of 2006, which allows automatic enrollment in the investment vehicles through 401(k) plans.
CITs have also gained ground on mutual funds within 401(k)s because they have corrected some technical limitations. Systems have been adopted to price and trade them daily, for instance.
Victory manages collective trust funds as well as mutual funds, and it deals with that fact by using a market segmentation strategy. Mutual funds are suitable for retirement plans with up to $75 million of assets, Kutz said, and CITs are appropriate for larger plans. "We don't want to cannibalize one product versus another."
For plans large enough to use CITs, it is hard to argue against them, he suggested. "I'd be hard-pressed to understand why a plan sponsor would want to utilize mutual funds when they can buy the same strategies at a 25% to 30% discount," he said.