Under Pressure Elsewhere, Mutual Funds Retain Lead in DC Advisor-sold Market
ISS Market Intelligence has released the latest edition in the Windows into Defined Contribution series. The Q1 2024 edition examines sales activity in the advisor-sold defined contribution (DC) market, demonstrating the persistent advantage that mutual funds have held onto in this arena.
2023 represented a year of recovery for a number of investment vehicles as public market returns rebounded following 2022’s interest rate hikes. Competition between vehicles though remained an ever-present concern, as structures across channels have sought to supplant the legacy position of mutual funds. While mutual funds have lost market share to collective investment trusts (CITs) among the largest defined contribution plans, they have held on stronger in the small- to mid-sized plan market.
DC advisor-sold plans see consistent sales
Fund and trust assets in the advisor-sold DC market stood at $1.27 trillion at the end of Q1 2024, according to data from the ISS MI BrightScope NEXUS consortium, which is sourced from 44 asset managers and recordkeepers and primarily covers the small- and mid-sized plan market. While this was an improvement from the $1.11 trillion seen at the end of 2022, assets have yet to return to their peak of $1.37 trillion from year-end 2021. Despite the shakeup in market returns, investor demand continued ahead in line with the consistency of retirement participant behavior prized by managers. Funds and trusts collectively gathered $92.6 billion in net inflows from the beginning of 2022 through Q1 2024.
The advisor-sold market contains a much wider number of plans managing smaller asset pools, whereas the consultant-driven market covers a limited number of plans that account for massive amounts of assets under management. BrightScope’s Defined Contribution Plan database found that the 401(k) plans with more than $1 billion in assets accounted for 1.5% of plans but 59.8% of assets. Nearly 90% of plans within the NEXUS consortium manage less than $10 million in assets. The wide number of plans across which assets are scattered poses consequence for what vehicles fare best in each market. CITs have excelled in the high end of the market, due in part to their customizability. These products are not publicly offered like mutual funds, exempting them from SEC regulation and allowing them to offer customized fee schedules, the latter of which holds intense appeal in a market where fees are such an intense subject of litigation. Managers are more willing to offer attractive fee schedules in exchange for larger pool of assets, cementing CIT usage among mega plans. CITs account for a majority of assets in target-date funds for plans with over $1 billion in assets, for example. However, their status as custom products has limited their movement down market. Offering customized product to a small number of large plans has proved more feasible than moving into the hundreds of thousands of smaller plans. Mutual funds have retained a persistent advantage in gross inflows as seen in the table below.
Mutual funds’ status as the legacy vehicle for retail and retirement investing has left them with a large lead in assets and gross inflows. Other vehicles can supplant larger rivals by experiencing faster growth rates. CITs did see a higher rate of gross inflows in 2021, at 45% of 2020 year-end assets, compared to 36% for mutual funds over the same period. In the intervening years, however, inflow rates for CITs have slowed to slightly below the pace of mutual funds. In 2022, CIT gross inflows accounted for 29% of prior year-end assets versus 30% for mutual funds. In 2023, the CIT inflow rate of 34% trailed the 35% witnessed by funds.
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By: Alan Hess, Vice President, U.S. Fund Research, ISS Market Intelligence
