CIT Providers Eye Downmarket Distribution

December 9, 2022 — Boston

Forging relationships with B/D home offices is critical to penetrating the smaller retirement plan market

While collective investment trust (CIT) providers continue to focus their distribution efforts on plans with $25 million or more in assets, providers have expressed a greater interest in the $5 million to $24 million plan market segment (84%) compared to 2021 (63%), according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.

The recent downmarket focus of CIT distribution trends is likely driving a decline in custom fee agreements. While the majority of asset managers allow for custom fee arrangements within their CIT products (87%), only 28% of their investors on average were in such an arrangement by year-end 2021. This figure represents an 11% drop from 2019. “Investment advisors and plan sponsors who manage smaller plans have less bargaining power than their larger counterparts, which historically have been the focus of CIT product distribution efforts,” says Shawn O’Brien, associate director.

The increased focus that CIT providers are showing in their distribution efforts among smaller DC plan clients implies additional partnerships between CIT managers and broker/dealer (B/D) firms will likely become more commonplace in the near future since small- to mid-sized plans are typically serviced by B/D-based advisors. CIT providers should seek to forge relationships with B/D home-office investment teams to expand their presence among these plans. “B/D home-office investment teams often are the ‘gatekeepers’ for DC plan investment selection,” says O’Brien. “The guidance, advice, and restrictions they implement ultimately dictate the fairly selective list of funds that are approved for advisor use in DC plans.”

However, the lack of commissions (12b-1 fees) in CITs could pose a challenge to the widespread vehicle use in the B/D-intermediated market. Cerulli recommends that asset managers engage B/D home-office research teams and retirement plan program managers to assess whether an opportunity for relationship pricing exists and, if so, whether that would help secure placement on their preferred funds list(s).

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