Mutual funds have a new competitor in the defined contribution market: collective investment trusts. These investments have been around for years but are now increasingly grabbing the attention of investors in defined contribution retirement plans.

According to a new report released this week by Celent, a research and consulting firm, the use of collective investment trusts (CITs) more than doubled from $400 billion in 2006 to $900 billion in 2010. By 2015, they’re projected to hit $2 trillion.

CITs no longer lack the transparency that hindered their growth in the past, said Alexander Camargo, an analyst at Celent and author of the report. Camargo said that though CITs have been available for more than 70 years, their lack of transparency in the past made them less attractive investment vehicles. Now that they’re on the National Securities Clearing Corporation’s settlement platform, CITs are traded and tracked in the same way as mutual funds. “Pricing is posted on a daily basis,” Camargo said of CITs.

CITs are similar to mutual funds in that they allow clients to pool assets into portfolios that are invested with specific philosophies and strategies in mind. Unlike mutual funds, however, they are not sold directly to retail investors. CITs are only available through 401(k)s and other qualified retirement plans. Another important difference is that they are exempt from Securities and Exchange Commission registration, lowering their disclosure and compliance costs, Camargo said in an interview.

In addition, CITs are less encumbered by trading restrictions than mutual funds, said Camargo. “Mutual funds with 401(k)s can often find trading hampered by short-term trading rules, redemption fees, Rule 22c-2 and other constraints,” he said.

The report examines developments in the defined contribution market, which has significantly grown its share of total U.S. retirement assets. By the end of 2010, defined contribution plans had $4.5 trillion in assets, representing a record-high 25.8% of the $17.9 trillion U.S. retirement market. Celent projects that by 2015 defined contribution retirement plans will amass between $5.7 trillion to $6.2 trillion.

Mutual funds have been the investment vehicle of choice in the defined contribution market, with approximately 55% of the DC assets. While Celent expects that level to grow from $2.5 trillion to about $3.1 billion to $3.2 billion by 2015, it does not expect mutual funds to make gains in market share. Celent projects that mutual funds will account for approximately 52% to 55% of the defined contribution market by 2015.

Collective investments trusts, on the other hand, are expected to make substantial gains in market share. Celent estimates that by 2015 the defined contribution market will hold approximately 29% to 34% of its assets in CITs, up from 20% in 2010. They will be the second-most popular investment vehicle, next to mutual funds, by 2015.

“The growth of mutual funds and of CITs is coming at the expense of DC assets in company stock, separate accounts, and variable annuities,” Celent writes in the report.

Margarida Correia writes for Bank Investment Consultant.




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