The potential impact on the 403(b) plan world is unclear because the university is benefiting from a private-letter ruling from the Internal Revenue Service.
Although the IRS letter provided an exemption for prohibitions on non-church 403(b) plans offering collective investment trusts, the university declined to provide the letter, describe a summary or say when the ruling was issued. Mr. Guimaraes would only say the ruling was "not recent."
Sources familiar with 403(b) plans said offering a collective investment trust in non-church plans is rare. DC consultants remarked that allowing 403(b) plans to offer collective investment trusts has slipped through the regulatory and legislative cracks over the years.
"It's the way the regulations were written," said Mike Volo, a senior partner, based in Wellesley, Mass., for Cammack Retirement Group.
"It's just the history of legislation," said Dan Pawlisch, associate partner and 403(b) practice leader for Aon Hewitt, Chicago.
The 403(b) plan law was enacted in 1958; these plans could only offer annuities until 1974. The Employee Retirement Income Security Act of 1974 contained a provision that allowed 403(b) plans to offer mutual funds, and a 2015 law allowed church plans to offer collective investment trusts.
A 2016 report co-authored by Mr. Pawlisch advocated revising the law to allow 403(b) plans to offer CITs, among other recommendations. "The legislation hasn't changed," said Mr. Pawlisch. "It seems archaic in this day and age."
Although mutual funds are regulated by the Securities and Exchange Commission and are covered by the Investment Company Act of 1940, CITs are governed by the Office of the Comptroller of the Currency and are considered unregistered securities. CITs have fewer reporting requirements than mutual funds. CITs are maintained by banks or trust companies."Asset managers offer lower fees in collective vehicles in defined contribution plans," said Mr. Guimaraes, citing the main reason the university sought to use collective investment trusts. The offering of collective investment trusts is part of an investment lineup restructuring that affects not only the $15.7 billion 403(b) plan but also the $2.4 billion 457(b) plan and the $4.2 billion 401(a) plan — all part of the university's Retirement Savings Program.
This is the third major restructuring in recent years of the university's defined contribution plans designed to reduce fees and simplify the investment lineup (Pensions & Investments, March 30, 2015 and Jan. 20, 2014). "It's the next evolution," Mr. Guimaraes said.
University investment officials spent about a year developing the strategy for the latest changes, he said. The result is a product of discussions with the UC Retirement Savings Program Advisory Committee, UC Chief Investment Officer Jagdeep Singh Bachher, the UC regents' subcommittee on investments and the Academic Senate. Officials also consulted with the university's human resources department, as the plans' fiduciary; Mercer, the plans' consultant; and Fidelity Investments, the plans' record keeper.
Investment options are identical for each plan, so the 457(b) and 401(a) plans also will offer the collective investment trusts.
For its three DC plans, the university is converting the Fidelity Growth Company Fund, an institutionally priced mutual fund, to a collective trust called the UC Growth Company Fund. The expense ratio will drop to 43 basis points from 66 basis points. The fund has $600 million in assets among the three DC plans, including $480 million from the 403(b) plan.
The university also will convert the Fidelity Diversified International Fund, also an institutionally priced mutual fund, to a collective trust called UC Diversified International Fund. The expense ratio will drop to 58 basis points from 92 basis points. The fund has $125 million in assets among the three DC plans, including $95 million from the 403(b) plan.
"These funds will have a new name but (will) keep the same investment strategy and manager," said a university document sent to participants, obtained independently by Pensions & Investments. The funds "will have lower fees because they will have lower marketing and overhead-related costs than similar, publicly traded mutual funds."
Mr. Guimaraes said the use of "UC" in fund titles represents a continuing effort to employ a white-label approach to its investment lineup — offering a simpler explanation of each option's strategy.
When the changes are enacted in October, all investment options will contain the "UC" white label designation — a target-date fund series, four fixed-income funds, three domestic equity funds, three international equity funds and two specialty stock funds.
In another fund restructuring taking effect Oct. 2, the university will switch the $1 billion institutionally priced share DFA Emerging Markets mutual fund to a separate account called UC Emerging Markets Equity. Dimensional Fund Advisors will remain the manager of the emerging markets separate account, using the same investment strategy. The expense ratio will be cut to 25 basis points from 58 basis points.