A prediction that had been circulating for the past couple of years apparently has come true, according to new data by Morningstar.
While collective investment trusts (CITs) nearly surpassed mutual funds in 2023 as the most popular target-date vehicle, the firm’s data now shows that they have, in fact, overtaken mutual funds.
According to Morningstar, at the end of 2023, CITs had $1.7 trillion—or roughly 49%—of target-date assets. Now, with target-date assets growing to approximately $3.8 trillion as of June 2024, CITs edged past mutual funds with about $1.9 trillion—or 50.5%—of target-date assets. Consequently, this left mutual funds with 49.5% of the target-date market share, down from 71% in 2015.
“Morningstar’s annual target-date landscape report took note of target-date CITs’ growth trend, which isn’t slowing. Their market share rise has been steady since 2015, gaining about 2 to 3 percentage points each year,” writes Morningstar Senior Analyst Megan Pacholok.
Target-Date Assets
As most industry observers likely know, target-date CITs have been steadily capturing most of the target-date net flows since at least 2020.
For example, in 2023, they collected more than two-thirds (67%) of total target-date net inflows. Yet, flows are not the only indicator of their success, Pacholok notes, adding that based on reported data, more than $22.6 billion in target-date mutual funds converted to CITs in 2023.
“Despite their shrinking market share, target-date mutual funds still hold a large part of the market and likely won’t be obsolete soon,” she further observed.
The Morningstar senior analyst noted that some firms have been more successful with target-date CITs than target-date mutual funds. “Vanguard’s Target Retirement series dominates no matter the vehicle, but other players, such as BlackRock and State Street, have gathered more assets in target-date CITs than they have in their mutual fund counterparts,” says Pacholok.
Advantages and Disadvantages
Why the migration? CITs typically are cheaper because they don’t have to follow the reporting standards of the Investment Company Act of 1940 that governs mutual funds.
And in addition to having lower administrative costs, plan sponsors can negotiate CIT fees with the providers, so, particularly for large retirement plans, CIT expenses are often lower than those of mutual funds, Pacholok explains.
“These lower fees have driven CIT growth, especially since plan sponsors loathe lawsuits accusing them of offering overpriced investment options in their retirement programs. This is a good trend because lower costs mean more money for retirees,” she emphasized.
In contrast, many contend that CITs are less transparent. For example, unlike mutual funds they don’t have to disclose their managers, their experience, or if they have joined or left the strategies recently, making it difficult to assess a management team, she explained. Within Morningstar’s target-date CIT database, 88 out of 141 strategies—or 62%—do not disclose manager names.
But while some have suggested that there is not enough transparency surrounding CITs, a recent NAPA guest post by Victor Siclari of Great Gray Trust argues that that’s an outdated characterization.
“CITs offer oversight and transparency comparable to investment vehicles like mutual funds and offer certain advantages over mutual funds,” says Siclari. He notes, for example, that unlike mutual funds, CITs are offered exclusively to tax-qualified retirement plans, subjecting them to different regulatory constraints. “This allows for more dynamic and responsive fund management,” he submits.