In the past two years, four providers of target-date funds have started collective investment trust versions of life cycle strategies to complement traditional mutual fund offerings.

The largest target date fund (TDF) providers continue to strongly favor the mutual fund form of TDFs over the collective investment trust form, as one-third of the providers only offer TDFs through a mutual fund vehicle, according to Portfolio Evaluations Inc., a Warren, N.J.-based consultancy that benchmarks investments for retirement plans.

Collective investment trusts are only available to investors through qualified retirement plans. Because they are not sold through the retail market, they have fewer disclosure requirements and subsequent costs. Issued by banks, they are not regulated by the Securities and Exchange Commission, but rather by state banking regulators in most cases.

Cost-conscious sponsors and a decade’s worth of high-profile claims under the Employee Retirement Income Security Act have sparked demand for target date funds in the form of collective investment trusts.

And as target-date funds in all forms have amassed more than $760 billion in retirement plan investments, competition between asset managers has intensified.

Unlike TDFs in mutual fund form, which carry different costs within a TDF family relative to the glide path — nearer-date glide paths are cheaper because they have higher allocations of fixed income — collective investment trust TDFs are uniformly priced.

In order to capture more market share, TDF collective investment trust providers are lowering minimum asset requirements traditionally required for plans to qualify for access to collective investment trusts in an effort to appeal to more plan sponsors.

In some cases, TDF collective investment trust providers are waiving asset minimums altogether, according to PEI’s analysis.

A review of the three largest TDF providers — Fidelity, Vanguard, and T. Rowe Price — shows the expense ratios on the lowest cost shares of TDF mutual funds are competitive with the collective investment trust versions of the funds.

The cheapest share class of Fidelity’s indexed TDF mutual fund is 16 basis points, and the cost of its collective investment trust version of the same fund is about equal.

In the case of Vanguard, the expense ratio on its passively managed TDF collective investment trust is eight basis points across all glide paths, cheaper than the 16 basis points for shares of it indexed TDF mutual fund.

As providers broaden access to TDF collective investment trusts, sponsors have a responsibility to evaluate their potential value to participants in executing their due diligence as fiduciaries.

In some cases, collective investment trusts may not be suitable, says PEI. Some CIT providers have anti-dilution policies, whereby the plan sponsor may be on the hook for costs to add or remove the investment from the plan lineup. In addition collective investment trusts are only available to qualified plans, therefore investors cannot roll-over their assets to the exact same investment in an IRA.

Instant Insights /

Collective investment trusts gain in popularity for target-date funds

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