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Collective Investment Trusts Gain Popularity as Target-Date Providers See Losses

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Target-date providers experienced losses in 2022, with gains coming from CIT-based funds.

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Collective investment trusts (“CITs”) have become an increasingly popular choice for 401(k) plan investment menus over the past decade, with a large portion of target-date strategies being invested in CITs. CITs are pooled investment funds sponsored by a bank or trust company that are only available to qualified retirement plans, such as 401(k) plans. They are similar to mutual funds, but with lower costs and fewer regulatory requirements.

Target-date strategies had $153 billion of net inflows in 2022, of which $121 billion—or 79%—went into collective investment trusts (CITs), according to a report by Morningstar. This shift toward CITs can be attributed to their lower fees and flexibility, as well as the fiduciary protection they offer to plan sponsors.

A volatile market is worrisome for many Americans, including - and maybe especially - those saving for retirement. However, CITs have been touted for their ability to provide stability during market fluctuations. This is due to their investment strategy, which focuses on long-term, diversified investments rather than short-term gains.

Thwarted by Congress' failure to let them offer collective investment trusts, executives of some 403(b) plans could offer a CIT-like option instead. The 403(b) plan is a retirement savings plan for employees of public schools and tax-exempt organizations. Many 403(b) plan executives have expressed interest in offering CITs, but the Employee Retirement Income Security Act (ERISA) has prevented them from doing so.

Wilmington Trust will sell its collective investment trust (CIT) business with about $115 billion in assets to a private equity firm, Madison Dearborn Partners (MDP). M&T Bank, the parent company of Wilmington Trust, agreed to the deal in order to refocus its resources on its core banking business.

M&T Bank (MTB) agreed to sell the Collective Investment Trust business of its Wilmington Trust unit to private equity firm Madison Dearborn. The deal is expected to close in the first quarter of 2023, pending regulatory approval.

Unit investment trusts (UIT) are another type of investment vehicle that is similar to CITs. UITs buy a fixed portfolio of securities and allow investors to redeem their 'units,' similar to a mutual fund. However, UITs do not have the same flexibility and fiduciary protection as CITs.

Wilmington Trust has reached a deal to sell its Collective Investment Trust (CIT) business to Madison Dearborn Partners (MDP). The deal is expected to close in the first quarter of 2023, pending regulatory approval. Wilmington Trust's CIT business has about $115 billion in assets under management.

In conclusion, collective investment trusts have become a popular choice for retirement plan investment menus due to their lower fees, flexibility, and fiduciary protection. As target-date providers experience losses in 2022, more investors are turning to CIT-based funds for stability during market fluctuations. However, the inability of some retirement plans to offer CITs due to regulatory barriers remains a challenge. The sale of Wilmington Trust's CIT business to Madison Dearborn Partners is indicative of the growing importance of CITs in the retirement investment space.


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