Morningstar - Q2 2023 - 13

40
gg qy
32
60%
20
EXHIBIT 1
two years, among the same cohort of plans,
CIT assets grew markedly quicker-10.8%
compared with 8.7% for mutual funds. Much of
this growth occurred in the plans with less
than $500 million but more than $100 million in
assets; but even smaller plans increased
their CIT assets by more than $15 billion in this
two-year period, suggesting CITs may finally
break the smaller-plan barrier soon.
Market returns are undoubtedly a contributing
factor in the greater growth of CIT assets
recently, but even small inroads into smaller
plans are worth considering given the barriers
that can limit their usage. One aspect of
CITs that can prevent smaller plans from using
them is that CIT minimums are often higher
than their mutual fund counterparts. Additionally,
employers sponsoring smaller plans may not
know about the advantages of this structure, may
also feel less comfortable with CITs, or
they may work with plan consultants, advisors,
or providers that have less incentive to
recommend CITs.
The plurality of CIT assets is invested in off-theshelf
target-date funds, a strong indicator
for their future per-plan market share. Target-date
funds are often the default investment for
plans that automatically enroll participants, and
even outside of automatic enrollment, they
are a popular choice for participants who want
a one-and-done investment choice.
Dipping Their Toes Into Sustainable Strategies
U.S. retirement plans often are not helping their
participants avoid ESG risks. The ESG Risk
Rating is a measure developed by Morningstar
Sustainalytics that seeks to capture the degree to
which companies fail to manage environmental,
social, and governance risks, potentially imperiling
their long-term economic value.1
Plans offer
investment options that are more likely to have
higher ESG risk compared with the overall
distribution of ESG risk in investments we rate
( EXHIBIT 2 ). Put another way, the companies that
participants' assets are invested in are less
likely to be addressing ESG issues, leaving them
more exposed to ESG risks. Additionally, on an
asset-weighted basis, participants generally
do not invest in strategies with low levels
of ESG risk. For example, just 3.3% of investment
options and 1.9% of assets are in strategies
with the lowest levels of ESG risk, but 10% of
1 Sustainalytics. 2021. " ESG Risk Ratings-Methodology Abstract, Version 2.1. "
morningstar.com/products/magazine
13
all strategies rated by Morningstar are
in this category.
Distinct from the question of managing ESG
risk, plans are beginning to offer investments
that incorporate sustainability into their
Bigger Plans Dominate Use of CITs But there has been a slight increase in usage
by smaller plans.
40
Percentage of Existing U.S. Equity Funds That Beat the Index
2022
2022 and 2008
32
40
12
10
20
30
2022
2022 and 2008
2022, 2008, and 2002
2002-22
Medium
Large
Mega
40
Small
Notes: Mega plans have more than $500 million in assets; large plans have $500 million or less in assets, but more than $100 million; medium plans have
$100 million or less in assets, but more than $25 million; and small plans have $25 million or less. These numbers only cover plans with at least 100 participants.
Source: Morningstar analysis of Form 5500 data and 2021 projections based on available filings.
10
20
30
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Medium
Large
Mega
EXHIBIT 2
Higher ESG Risk Offerings in defined-contribution plans are more likely to have
higher ESG risk scores than investments overall.
60
2012
40
Percentage of Assets
Percentage of Investment Options and Assets in Defined-Contribution Plans by ESG Risk
20
60
40
20
Low
ESG Risk Level
Below Average
Average
Above Average
High
Source: Morningstar investment data matched with Form 5500 data for 2020 and the Morningstar® Sustainability Rating.™
Low
ESG Risk Level
Below Average
Average
Above Average
High
Standard Distribution
of Investments
Percentage of
Investment Options
Percentage of Assets
Standard Distribution
of Investments
2013
2014
2015
2016
2017
2018
2019
2020
2021
Percentage of
Investment Options
Small
Percentage of Defined-Contribution Plan Assets in Collective Investment Trusts by Plan Size
20
26
2022, 2008, and 2002
2002-22
26
58
12
Percentage That
Beat the Index Both
in Down Markets
and Overall
g
Beat the Index Both
in Down Markets
and Overall

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