Secure Act 2.0: Changes for 403(b)s Around Access to Collective Investment Trusts

Collective Investment Trusts have gained steam as a popular investment option for 401k plans. According to Sway Research, CITs are expected to surpass mutual funds as a target-date product for 401(k) plans in the coming years.

Before the SECURE Act 2.0, CITs were only made available to DC 401(k) plans, leaving 403(b) and other nonprofit entities out of this great option for their retirement plan. As one of the many provisions of SECURE 2.0, it made it possible finally for CITs to be available within 403b lineups. This was a huge relief and excited many plan sponsors for this opportunity.

The only issue is that while the SECURE 2.0 Act of 2022 was being signed into law, the House Financial Services did not have time to address potential concerns with “consumer protections” fully and it excluded amendments required to fully permit the usage of CIT’s. This lack of updating the securities laws creates a large roadblock to CITs within 403bs and the advantages they could have for these plans. In this post, we will outline what a CIT is and what the advantage could be for 403(b)’s once these final items are addressed.

What is a CIT - And Why Should 403(b)’s Want to Use Them? The Push to Permit CITs in 403(b) Plans

CITs are pooled investment vehicles used for qualified retirement plans. They are provided through a bank or trust. A unique feature is that the bank or Trust Company sponsoring them acts as the trustee for those assets. They are a pool or group of investment assets invested as a private investment portfolio mirroring a specific strategy often used by an investment manager. This mirrored strategy is generally already used in a mutual fund offered to eligible investors in a qualified retirement plan, 401(K), 457, or 401(a). The use of these CITs within your fund lineup has many benefits, including:

• Possible Cost Savings
• White Labeling
• Safety from Litigation

CITs are leveraging the idea of providing the plan participants with an advantage for pooling their retirement assets. It allows the participants to get the same investment strategy, often at a lower cost, which could often be lower than the lowest available share class in a mutual fund. Their structure also allows for CITs to be highly customizable or white-labeled .

A 403(b) plan is like a 401(k)-retirement plan in that it lets employees put money back for retirement from their work salary. 403(b) plans are limited to public schools, nonprofits, and church workers. CITs have a variety of regulations to abide by, and they are not allowed to be included in 403(b) plans. Currently, the only permissible investments for 403(b) plans are mutual funds and annuities. Due to CITs not being included in the law, 403(b) plan sponsors are not able to include them in retirement plans.

There is constant litigation in our industry. Plan sponsors are scrutinized for not utilizing a mutual fund's lowest share cost. Even more recent litigation has surrounded plan sponsors not using the lowest share cost, including CITs. It opens additional fiduciary liability for plan sponsors not utilizing CITs as a lower-cost investment structure. A prudent practice for a plan sponsor would be to include CITs in their investment benchmarking and review. If they can be determined to participants, they should be taken into strong consideration. This review and consideration are another best practice for those fulfilling their fiduciary obligations. Once these are permitted for 403(b) plans reviewing CITs as part of your plan or part of your thought process, otherwise, it could become a future liability.

In the wake of Secure Act 2.0, the foundations for a path that will allow CIT’s to be utilized within 403(b) plans have been established but are still incomplete. This result was due to the House Financial Services not having time to address potential concerns with “consumer protections” fully and excluding amendments required to permit the usage of CIT’s. For this to be possible, further action is required to clarify/frame amendments that will address any unintentional disruption to consumer protections.

It is apparent that a bipartisan congress is working to come to an agreement to secure these changes and that it is only a matter of time.

When Congress and CITs fully address these issues, we believe there will be a boom for 403(b) plans since Public Educators and nonprofit employees should have the same level of access to the benefits of using CITs.

Are you interested in learning more about SECURE 2.0? Check out our SECURE 2.0 Hub for more on how this legislation can impact you plan!