In Practice February 26, 2025

Legislation Reintroducing CITs to 403(b) Plans Gains Momentum

Collective investment trusts would provide increased choice and flexibility, says Equitable’s Fred Makonnen.

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A renewed legislative effort to allow collective investment trusts in 403(b) retirement plans is gaining traction after being reintroduced. The legislation, originally part of the SECURE 2.0 Act of 2022 but then removed, aims to bring cost-effective investment options to educators and other nonprofit employees, aligning 403(b) plans more closely with 401(k) and 457 plans, where CITs are already available. 

For plan sponsors and advisers, the inclusion of CITs could provide greater investment choice and pricing flexibility, according to Fred Makonnen, chief sales officer and head of group retirement sales and distribution at Equitable Holdings Inc. The registration and filing mechanics of a security-registered product add costs that are often passed on to participants. The private sector in the 401(k) market takes advantage of low-cost options, and having that same solution available to educators and other government employees creates parity between the markets. 

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Advisers, he notes, would benefit from a broader suite of investment strategies available in plans. 

“CITs represent an evolution in creating low-cost investment strategies,” Makonnen says. “Target-date funds were a first step, managed accounts a second, and CITs are the third leg in constructing cost-efficient investment menus for participants.” 

If the legislation passes, Makonnen says he expects CITs to gain traction in 403(b) plans, especially in place of mutual fund target-date funds. 

“Morningstar predicts that within two years, CITs will outpace traditional mutual fund target-date funds,” Makonnen says. “That validates demand at the plan participant and adviser level.” 

While there are few apparent downsides, slow adoption in smaller 403(b) plans is likely. 

“The biggest hurdle is education: Plan sponsors and advisers need to understand the benefits of CITs,” Makonnen states. However, state-level and large 403(b) plans could see faster adoption due to consultant-driven investment decisions. 

Critics argue that CITs, not being registered with the Securities and Exchange Commission, lack sufficient oversight, but Makonnen counters that they are regulated by federal banking agencies under the U.S. Department of the Treasury. The benefits of low cost and flexibility far outweigh concerns, he says. 

With bipartisan support for retirement plan modernization, Makonnen says advisers should prepare for changes. 

“This is an opportunity for advisers to enhance their value proposition and advocate for better investment options in the 403(b) space,” he states. 

Compliance February 25, 2025

Judge Approves DOL’s Appeal to Pause Fiduciary Rule Litigation

The circuit judge granted a 60-day abeyance in two lawsuits against the DOL over its Retirement Security Rule.

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A federal judge for the U.S. Fifth Circuit Court of Appeals granted a motion filed by the Department of Labor to delay its appeals in two court cases about the department’s 2024 Retirement Security Rule—also known as the fiduciary rule.

Judge Catharina Haynes granted the DOL’s unopposed motion to stay proceedings in the cases to allow new DOL officials sufficient time to become familiar with the issues in these cases and determine how they wish to proceed.

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The court granted a 60-day abeyance in the case between the Federation of Americans for Consumer Choice, Inc. et al. v. U.S. Department of Labor and Acting Secretary Vincent Micone.

The DOL sought the stay in a filing on February 11.

The fiduciary rule was previously finalized by the department and scheduled to take effect September 23, 2024, but hit legal roadblocks in the form of complaints filed by industry firms and member organizations.

The U.S. District Court for Northern District of Texas put a national stay on the rule in a July 26, 2024 opinion in the case, American Council of Life Insurers v. DOL. One day prior to that ruling, the federal court in the Eastern District of Texas had also granted a stay for the plaintiffs in a separate case, Federation of Americans for Consumer Choice Inc. et al. v. DOL et al. 

Both lawsuits sought to block the rule, which required “trusted investment advice providers” and financial institutions working with them to operate as fiduciaries in most cases when advising on retirement plan design, annuity sales and individual retirement account rollovers.

Plaintiffs have argued in both suits that the DOL’s rule exceeded its authority under federal law, is “arbitrary and capricious” and had the “same legal defects” as the rule attempted in 2016, which was eventually struck down by the Fifth Circuit Court of Appeals.

The DOL has since argued that the rule currently being challenged is different from the one blocked 2016, in part because it more clearly addresses when retirement plan rollover advice and annuity sales fall under fiduciary guidance.

While Micone is listed as a defendant on the case filed by the Federation of Americans for Consumer Choice, President Donald Trump’s nominee for Secretary of Labor, Lori Chavez-DeRemer, awaits Senate confirmation. The Senate Committee on Health, Education, Labor and Pensions last week held a confirmation hearing on her nomination.

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