According to the Investment Company Institute (ICI), U.S. retirement assets topped $26 trillion in Q1 2017 growing 3.2% from the previous quarter led by defined contribution (DC) plans like 401ks and 403bs as well as IRAs. But that number might be even bigger if collective investment trusts (CITs) were counted.
DC plans held $7.3 trillion in Q1 up 3.7% from Q4 2016 while IRAs grew by 4.1% to $8.3 trillion. All told, IRAs and DC plans now hold 60% of U.S. retirement plan assets up from just 50% in 2007 growing two to three times faster than government and private DB plans.
401k plans held $5 trillion in assets followed by $1 trillion in 403b plans. Mutual funds accounted for 64% with equity funds the largest sector followed by hybrids like target date funds (TDFs) at over $800 billion. Unfunded liability of government defined benefit (DB) plans stood at $3.8 trillion leading many entities to move to a DC plan which will further increase flow. Some academics estimate a much higher number.
Experts estimate that TDFs hold $1.5 trillion, not the over $800 billion in the ICI data, if CITs were included. For many providers like BlackRock, flows into CIT TDFs are growing faster than mutual funds. DC plans with more than $1 billion hold 40% of assets in CITs compared to 30% in mutual funds – much less for smaller plans which is likely to change.
Driven by lower costs and the focus on fees by many lawsuits, CITs are expected to grow offered by larger advisors groups that can offer custom CIT TDFs and other asset classes. Traditionally, smaller plans could not access CITs because they did not make economic sense for an individual plan with less than $250 million
Though CIT performance is harder to find for investors than with mutual funds, access to information is growing and the fact that CITs are valued less frequently is less important in retirement plans, especially TDFs, where money is held longer.
The ICI data, along with the growth of CITs, provide valuable insights:
- The move to participant directed, employer sponsored in the dominant form of savings for Americans especially if you figure that most IRAs are driven by rollovers from DC plans.
- The demand and focus on lower fees will increase the move to CITs.
- All organizations, private or public, need to pay more attention to their DC plans not just to avoid liability but to help workers attain some degree of financial security so that they are more productive at work and can retire at the right time for them and their organization to keep benefit and salary costs reasonable
