Commentary: CITs in 403(b) plans — An idea whose time is past due

In late March, the House of Representatives approved the Securing a Strong Retirement Act, or SECURE 2.0, building on the first SECURE Act passed in 2019. It passed virtually unanimously, with a bipartisan vote of 414-5, and is now in the Senate.

While SECURE 2.0 has a number of provisions that would certainly benefit retirement savers and employers, it fails to include a provision to allow the use of collective investment trusts by 403(b) plans — despite the availability of CITs to participants of all other employer-sponsored defined contribution retirement plans.

Why is the National Association of Government Defined Contribution Administrators beating the drum for the inclusion of CITs in 403(b) plans? Quite simply because, as the rapid growth in their use by defined contribution plans indicates, they provide participants with a better, more cost-effective alternative to their current choices of mutual funds and annuities.

Cost efficiency is particularly important for 403(b) plan participants — employees of tax-exempt organizations such as nonprofits, churches, hospitals and public education institutions — who typically are paid significantly less than private-sector 401(k) plan participants. Additionally, the defined benefit plans these participants have traditionally relied on are no longer as robust as they once were. According to the National Association of State Retirement Administrators, every state has enacted substantial defined benefit pension reform since 2009, including lowering benefits or reducing cost-of-living increases. That makes the 403(b) plan more vital than ever to the retirement security of its participants.

Similar to mutual funds, CITs are tax-exempt, pooled investment vehicles held by a bank or trust company. Unlike mutual funds, CITs are only available to institutional investors within employer-sponsored DC retirement plans, including 401(k) plans and governmental 401(a) and 457(b) plans. CITs do not serve retail investors and are not, as mutual funds are, regulated by the Securities and Exchange Commission under the Investment Company Act of 1940.

CITs are not regulated or marketed in the same way mutual funds are, and the administrative and regulatory costs are generally lower than those of mutual funds, enabling the significant benefit of lower expense ratios for participants.

In a comparison of net expense ratios of CIT tiers and mutual fund share classes of the same strategy, a Morningstar Inc. analysis from June 2020 found that CITs are cheaper 91% of the time. The analysis states that "with the reduced overall cost … plans with CITs are, on average, less expensive than those without, while potentially offering more transparency into the types of fees the participant is paying." Additionally, CITs offer more pricing flexibility, with fee structures based on services and assets versus set asset-based fees determined by share class for mutual funds.

While CITs have been around since 1927, their adoption by DC plans accelerated in 2000 when their operating procedures were made more comparable to those of mutual funds, such as providing daily valuation and standardized transaction processing. In 2006, with the provision of qualified default investment alternatives by the Pension Protection Act, target-date funds, which are the most widely adopted QDIA, were implemented as CITs.

As the assets of these target-date CITs have grown, so have the assets of CITs generally. CIT coverage by database vendors has also increased, improving transparency and reporting capabilities. As a result, the assets in CITs have outpaced mutual funds within the qualified retirement plans in which they're allowed. Since 2012, CIT use has grown 56% within DC plans.

According to Cerulli Associates' report, "U.S. Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities:" "The vast majority (92%) of managers currently offer a target-date series in a CIT. CITs have grown in popularity as pressure for providers to offer lower-cost investment vehicles continues to increase across the industry … 2021 has seen the use of CITs grow in place of traditional '40-Act funds as the retirement vehicle of choice."

The Cerulli report identifies the following as the leading factors cited by CIT providers in weighing the development and distribution of CITs:

• lower costs (97%);
• importance as additional offering for an existing strategy (78%); and
• the ability to negotiate fees (72%)

Additionally, the report said, "Many CIT providers have lowered their investment minimums and, in certain cases, waived minimums altogether..." and "CITs with low (or no) investment minimums are more tenable investment options for smaller plans ..."

In hailing SECURE 2.0's passage by the House, its sponsor, Richard Neal, D-Mass., chairman of the House Ways and Means Committee, said the bill "will help all Americans successfully save for a secure retirement by expanding coverage and increasing retirement savings, simplifying the current retirement system, and protecting Americans and their retirement accounts."

As the goal of this and any related legislation is to improve our nation's retirement system in order to help all Americans increase their retirement savings, isn't it time 403(b) plans had access to CITs and the many benefits they provide participants?

Matt Petersen is the Houghton, Mich.-based executive director of the National Association of Government Defined Contribution Administrators, an association for plan administrators and services providers of government-sponsored defined contribution retirement plans. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.