As defined contribution (DC) plans begin to integrate private markets, DC ecosystem participants are seeking to use collective investment trusts (CITs) to offer private market strategies through professionally managed solutions. However, asset managers must adapt their private market strategies to ensure they align with existing DC infrastructure, according to the latest Cerulli Edge—U.S. Institutional Edition.

Cerulli finds that industry participants seeking to provide DC plans with access to alternative strategies, specifically private market strategies, are not seeking to make them available directly on plan menus for plan participants to select. Instead, they want to incorporate them into professionally managed solutions, such as target-date products or managed accounts.

According to the research, the CIT is an optimal vehicle for providing access to private markets. It offers flexibility in holdings, lower operating costs, and the potential for fee negotiability. Across 401(k) channel assets, the structure now accounts for approximately 38% of total 401(k) channel assets, up from 30% at the end of 2019.

Within CITs, asset managers say they plan to offer a range of sub-asset classes to DC plans. Notably, these include private real estate—36% of DC asset managers currently offer the strategy to their DC clients, and another 23% plan to offer it. Private credit is also viewed by asset managers as an early potential area of adoption by DC plans, and while 20% currently offer it, a larger 48% plan to offer it in the future.

“To adapt private market strategies to the DC ecosystem, asset managers are modifying their strategies, most notably by adding liquidity and providing more frequent valuations, among other operational considerations,” says Brendan Powers, director. “These elements are crucial for managers to get right as they look to meet the expectations of plan sponsors, intermediaries, and recordkeepers.”

Cerulli believes it will be incumbent upon asset managers and other DC ecosystem firms to prove how these strategies can help plans improve their risk-adjusted returns and provide better outcomes for plan participants. “Asset managers looking to offer alternatives in the DC space must be able to ensure the quality of the product they are providing to both new and existing clients will remain high as they expand their offerings,” concludes Powers.