Last fall, Cerulli Associates released a report on the defined contribution (DC) investment-only segment, US defined contribution distribution 2021: uncovering investment-only opportunities. WealthManagement.com recently spoke with Sean O’Brien, CFA, senior analyst, retirement and lead author of the report, about some of the research findings.
WealthManagement.com: The report suggests that Collective Investment Trusts (CITs) are making strong inroads into the DC market. what are you seeing there?
Sean O’Brien: Our data suggests that the 401(k) market has accelerated adoption and use of CITs over time. While there is a lot of talk about CIT, our data shows that it is legit and that increased adoption is happening. In terms of why we’re seeing more utilization, to a large extent it’s clearly CIT’s ability to negotiate a lower cost structure and custom fee regime. But I think as you look down-market, there are more opportunities for a midsize-plan advisor or even a small-plan advisor to use CIT because there’s a lot of asset managers and trustees who When CITs offer, their investments are minimal. The minimum investment for a CIT has generally come down significantly over the years. Years ago, they were really only accessible to more institutional plans and the advisors and advisors who worked with them. Now I think that in a lot of cases, CITs are more attainable for that medium sized plan or that small plan.
WM: The 401(k) market is seeing a steady increase in the use of target-date funds. What’s up with the target-date funds at CIT?
SOB: We’re looking at data on target-date fund closures and launches by vehicle. There were more target-date mutual fund closures than there were launches in 2019 and 2020. Meanwhile, over 20 target-date CIT series launched in 2020. I think asset managers recognize that there are a lot of benefits to a CIT structure, primarily cost. And they are focusing their product development efforts on this with the CIT in mind rather than the ’40 act mutual fund’ in many cases.
WM: Your report also discusses retirement income products and solutions. This is a hot topic among planning consultants and sponsors—what developments and trends did you find?
SOB: From the product side, we see two perspectives. One is an enhancement of a “set it and forget it” target-date fund in which a target-date manager comes to market with a new series that includes some sort of guaranteed income component. The idea is that participants are automatically enrolled in target-date funds and at some point, near retirement, they have the ability to annuitize a portion of that savings. It’s an approach we’re seeing and many target-date managers—BlackRock, American Century and Capital Group—have come to market with these types of products since the recent SECURE Act.
The second approach I would say is a more personal approach. This approach is based on the premise that retirees and new retirees need a more personalized approach to retirement income and decline because there is so much complexity. They need to start thinking about claiming Social Security; How to reduce their savings in retirement in a tax effective manner; 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 second approach to retirement income that we’re starting to develop is personal decluttering. . When we talk to managed account providers, many are telling us that a major focus for them going forward is building out their deaccumulation features to help facilitate that in-plan experience when the plan sponsor wants. can get help.
When you think about in-plan deaccumulation, however, plan fiduciaries need to consider more than just investment products—you need to think more broadly about plan design. You can have all these great retirement income products in one plan lineup, but if you don’t have a plan design that facilitates in-plan deaccumulation, it’s not necessarily going to work well. For example, if you don’t have a recordkeeper who is able to facilitate flexible withdrawals and plan documents that allow for flexible withdrawals and the types of tools and planning guidance that can help a new retiree know While helping them figure out what they need as they enter retirement, it may not work out very well. There are a lot of considerations that go beyond just the product when it comes to creating an in-plan decumulation experience.