Last fall, Cerulli Associates released a report on the defined contribution (DC) investment-only segment, U.S. Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities. WealthManagement.com recently spoke with Shawn O’Brien, CFA, senior analyst, retirement and the report’s lead author about some of the research findings.
WealthManagement.com: The report indicates that collective investment trusts (CITs) are making strong inroads in the DC market. What are you seeing there?
Shawn O’Brien: Our data suggest there's been an uptick in adoption and use of CITs in the 401(k) market over time. While there's a lot of talk about CITs, our data suggest that it’s legitimate and this increased adoption is occurring. In terms of why we're seeing a greater use, to a large extent it’s obviously the low-cost structure of CITs and the ability to negotiate custom fee arrangements. But I think as you look down-market, there are more opportunities to use CITs for the midsize-plan advisor or even smaller-plan advisor because a lot of these asset managers and trustees that offer CITs are lowering their investment minimums. The investment minimums for CITs have in general come down quite a bit over the years. Years ago, they were really only accessible to more institutional plans and the consultants and advisors that worked with them. Now I think in a lot of cases, CITs are more attainable for that midsize plan or even that smaller plan.
WM: The 401(k) market is seeing continued growth in the use of target-date funds. What’s happening with target-date funds in CITs?
SOB: We've been looking at data on target-date fund closures and launches by vehicle. In 2019 and 2020 there were more target-date mutual fund closures than launches. Meanwhile, there were more than 20 target-date CIT series launches in 2020. I think asset managers recognize that the CIT structure has a lot of benefits, mainly the costs. And they've been focusing their product development efforts on this with the CIT in mind, rather than the ‘40 Act mutual fund in a lot of cases.
WM: Your report also discusses retirement income products and solutions. It’s a hot topic among plans advisors and sponsors—what developments and trends did you find?
SOB: From the product side, we see two approaches. One is the augmentation of the “set it and forget it” target-date fund in which a target-date manager comes to market with a new series that incorporates some sort of guaranteed income component. The idea being that participants are automatically enrolled in the target-date funds and at some point, near retirement, they have the ability to annuitize a portion of that savings. That's one approach that we're seeing and several target-date managers—BlackRock, American Century and Capital Group—have all come to market with these types of products recently since the SECURE Act.
The other approach I would say is the more personalized approach. This approach is based on the premise that retirees and new retirees need a more personalized approach to retirement income and decumulation because there's a lot of complexity there. They have to start thinking about claiming Social Security; how to effectively draw down their savings in retirement in a tax-efficient way; how they should be allocated and so forth.
A “set it and forget it” approach that's off the shelf isn't necessarily personalized enough for that retiree, so the other approach to retirement income that we're starting to see develop is personalized decumulation. When we talk to managed account providers, several are telling us that a major focus for them moving forward is building out their decumulation features to help facilitate that in-plan experience if the plan sponsor wants it.
When you think about in-plan decumulation, though, plan fiduciaries need to consider more than just the investment products—you have to be thinking about plan design more broadly. You can have all these great retirement income products in a plan lineup, but if you don't have a plan design that facilitates in-plan decumulation, then it's not necessarily going to work well. For example, if you don't have a record-keeper that is able to facilitate flexible withdrawals and plan documents that allow for flexible withdrawals and kind of the tools and planning guidance that will help a new retiree figure out what they need as they enter retirement, it may not work very well. There are a lot of considerations that go beyond just product when it comes to creating an in-plan decumulation experience.