Legislation Reintroducing CITs to 403(b) Plans Gains Momentum

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. 

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.