Asset Managers Seek to Bring Alternatives to DC Plans via CITs and Interval Funds

October 8, 2024 — Boston

Managers must offer optimal vehicle structures to appeal to DC plan sponsors

While adoption of alternative investments in defined contribution (DC) plans continues to be limited, new Cerulli research finds asset managers are seeking to make inroads via collective investment trust (CIT) and interval fund structures. According to The Cerulli Report—U.S. Defined Contribution 2024, about one-quarter of asset managers report they currently offer each, and 17% and 25% report they are considering offering these structures, respectively, to DC plans in the next two years.

Cost, liquidity, and plan sponsor inertia have hindered adoption of alternative investments in the DC channel. Alternative investments are typically more expensive and can include performance fees and other embedded operational costs. Moreover, alternative investments often involve long lockup periods—a sort of illiquidity in direct conflict with DC plans, where it is expected for participants to be able to change their investment allocation without liquidity restraints. Increasingly, one of the more notable challenges to adoption is plan sponsor inertia. Over the last five calendar years, nearly one in six asset managers (17%) view plan sponsor inertia as a serious challenge, while approximately three out of five (62%) view it as somewhat of a challenge to innovation in the DC space.

Prioritizing optimal product structures that address sponsor concerns will be important for asset managers. “The most optimal structures will be those that make alternative investments more accessible and attractive to DC plan sponsors,” says Idin Eftekhari, senior analyst. The research cites the viability of collective investment trusts (CITs) as a packaged product given their less stringent liquidity and reporting requirements relative to mutual funds. According to the research, CITs are the most popular vehicle of choice (28%), slightly edging interval funds (25%).

Target-date funds will likely be a focal point. Half (52%) of managers expect alternative investments will be incorporated through a custom target-date fund, while 43% say that it will occur through a white-label fund of funds. Custom target-date funds, for instance, can provide exposure without requiring participants to make difficult choices regarding complex investments.

Looking ahead, Cerulli expects the adoption of alternative investments in the DC space to continue to grow—albeit incrementally. Addressing liquidity and cost concerns while tailoring strategies to meet plan sponsors’ specific needs will further facilitate this upward trend. From a distribution perspective, Cerulli recommends target-date managers—and other DC-focused asset managers seeking to incorporate alternatives into DC-focused products—establish strategic relationships with alternative investment managers that may lack direct access to the DC ecosystem. Such collaborations can streamline the integration of alternative investments into DC plans by offering ready-made investments that appeal to DC plan sponsors and participants.

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