Target-Date Investors Have A New Favorite Vehicle

collective investment trusts CITs

A volatile market is worrisome for many Americans, including — and maybe especially — those saving for retirement. Most retirement savers aren’t looking to make the huge gains professional investors are, just to grow their money slowly and steadily so they can stop working at a reasonable age and have enough in their accounts to live comfortably.

With that in mind, a new report from Morningstar shows that target-date strategies — which are designed specifically for retirement savers — are increasingly investing in collective investment trusts (CITs) rather than mutual funds.

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Collective Investment Trust Basics

A CIT is a type of tax-exempt pooled investment vehicle. They are generally only available to those participating in a workplace retirement plan such as a 401(k).

Money is pooled to create a large, diversified portfolio. Various assets can be bought using money in a CIT, including stocks, bonds and mutual funds.

Morningstar Survey Findings

Morningstar’s data found that within the next two years, CITs are on pace to overtake mutual funds as the most popular target-date vehicle. Currently, CITs hold 47% of all target-date strategy assets.

In 2022, target-date strategies saw $153 billion of net inflows. Around $121 billion went into CITs, meaning that 79% of all money put into target-date strategies is not going into mutual funds.

More generally, target-date assets fell to $2.82 trillion, down from a record high of $3.27 trillion in 2021. That 14% drop is driven largely by the depreciation of the market, not by people moving their money out of the vehicles.

Should You Use Target-Date Strategies?

Target-date strategies are popular with retirement savers because they are seen as a “set-it-and-forget-it” option. You put your money into a vehicle with a target-date near when you plan to retire, and the fund company will tailor the investments to that date. Early in the life cycle of the fund the investments will be more aggressive, but as retirement approaches the portfolio gets more conservative and focuses on asset protection.

That said, some experts say that target-date funds tend to underperform, and that by tapering their portfolio themselves — or hiring a financial advisor to do so — investors could be better prepared for retirement.

The Bottom Line

New data from Morningstar shows that collective investment trusts (CITs) are becoming the most popular target-date strategy, and will overtake funds within two years. Target-date strategies overall remain very popular. Considering matching for free with a vetted financial advisor to integrate CITs into your investment strategy.

Retirement Saving Tips

  • A financial advisor can help you make the right decisions for your own retirement portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you are using a 401(k), make sure you take advantage of any employer match available to you.

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