Mutual funds have been the preferred vehicle for Target Date Funds since TDFs' infancy. Because Target Date Funds employ a fund-of-funds structure, it made sense for TDFs to be offered in a mutual fund vehicle as well. However, the TDF market is transitioning to Collective Investment Trusts (CITs) as a preferred vehicle.
By Clayton Fresk on January 23, 2020
Mutual funds have been the preferred vehicle for Target Date Funds since TDFs’ infancy. This was logical as mutual funds have been around for a long time and are widely utilized. Because Target Date Funds employ a fund-of-funds structure, it made sense for TDFs to be offered in a mutual fund vehicle as well.
However, the TDF market is transitioning to Collective Investment Trusts (CITs) as a preferred vehicle. At its basic level, a CIT and mutual fund are very similar in that they are a comingled vehicle. However, properly established CITs are exempt from the Investment Company Act of 1940 (AKA “40-Act”) and thus have a less stringent regulatory regime.
The major benefit of CITs vs mutual funds is costs. Because of lighter statutory and governance requirements, CITs are quite often cheaper than a comparable mutual fund. However, there are some drawbacks. CITs are less transparent, and because of their regulatory regime, not all accounts are eligible to invest in CITs – such as 403 (b) retirement accounts, traditional brokerage accounts and individual retirement accounts.
A little over a decade ago, target date fund assets began to trickle away from mutual funds and into CITs. For the past 8 or so years, though, the faucet has been turned on.
Below is a chart showing the percent of overall TDF Assets Under Management (AUM) in mutual funds and CITs, since 2000 (2019 preliminary).
(Chart Source: Stadion)
Since the first TDF CIT was brought to market in 2003, CITs have grown to nearly 40% of the overall AUM, and at a similar run rate could overtake mutual fund AUM within the next five years.
While new market entrants are driving some of this growth, many issuers run the same strategy in mutual fund and CIT form. Based on flows, it appears some of these issuers are actively getting plans to switch to the CIT structure.
Author: Clayton FreskClayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.
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