Collective investment trusts (CITs) are gaining popularity in 401(k) plans as low-cost investment options. However, 403(b) plans are not allowed to utilize this low-cost vehicle.
One exception, according to Angela Montez, senior vice president, general counsel and chief legal officer at ICMA-RC, is 403(b)(9) retirement income accounts offered by church plans as they are not subject to the investment restrictions of 403(b)s. Bruce Corcoran, managing vice president/head of 403(b) Business at ICMA-RC, says in these plans, CITs are highly utilized.
Montez explains that 403(b) plans are limited to annuities and mutual funds for investments. CITs used in retirement plans operate under Section 3(c)(11) of the Investment Company Act, which provides an exemption from having to register as mutual funds with the Securities and Exchange Commission (SEC) for collective trusts that hold investments for qualified plans, governmental plans and church plans. Montez adds that the exemption only covers 401(a) plans and government plans other than 403(b)s.
CITs offer a variety of benefits for plan sponsors and participants, according to Montez. The greatest benefit is cost reduction. “Right now, there are estimates that tens of billions could be saved by 403(b) participants from investing in CITs,” she says. “They operate similarly to mutual funds but because they are not mutual funds, some costs are not built in to the product.”
In addition, Montez says, many municipalities that sponsor 457 plans also have 403(b)s. Being able to offer CITs in 403(b) would allow for the same investment options in all plan types. “Having different options in different plans adds to the complexity for boards that have to monitor investments,” she says.
In the last couple of years, ICMA-RC has started working through industry groups to go “up to The Hill” to advocate for a change in securities law that would allow 403(b) plans to use CITs, according to Montez. ICMA-RC has also met with staff of legislators to advocate for standalone legislation or for the ability to use CITs to be included in current legislation being considered. Montez notes that U.S. Senators Ben Cardin, D-Maryland, and Rob Portman, R-Ohio, in December of 2018, introduced the Retirement Security and Savings Act, in which Section 118 calls for CITs to be permitted investments in 403(b)s.
“In addition to our own legislative efforts, we are trying to build support from stakeholders—teachers, providers and other industry groups,” Montez says.
ICMA-RC has also made an attempt to get a private letter ruling from the IRS about offering CITs in 403(b) plans as underlying investments in annuity contracts or other investment vehicles.
Corcoran says plan sponsors have often sought CITs, because they raise the bar for the highest-quality investment menu, and it can streamline administration if plan sponsors have CITs in all plan types. “We’ve heard the need for these investment options in 403(b) plans from advisers, consultants and plan sponsors for decades,” he says. “It is nice in our advocacy efforts to be able to point to people who have the best interest of participants in mind to bring to new level of excellence to their plans.”“We will continue to help advocate for anything that will help public plans and participants,” Montez concludes.