Great Gray Presses Senators to Allow 403(b) Plans to Use CITs

Collective investment trust provider Great Gray Trust Co. LLC and two law firms have sent individual letters to all U.S. Senators, including the heads of the Senate Banking Committee, advocating for the passage of a bill that would allow 403(b) plans to invest in the defined contribution investment vehicle.

The letters from Great Gray and its counsel, Covington & Burling LLP and Groom Law Group, are part of an effort to get a bill passed before the year is out that will allow CIT investing by nonprofit organizations ranging from schools to churches. The effort is also, in part, a response to a letter six investor advocacy groups sent to the committee earlier in November seeking to kill the proposal.

In that letter, six groups that included the Americans for Financial Reform and the Consumer Federation of America argued that CITs—which, unlike mutual funds, are not registered with the Securities and Exchange Commission—would expose 403(b) plan participants to investment risks. They argued that the bill would expose more investors to the risks of “illiquid, opaque, high-risk and often predatory private markets.”

The bill to allow 403(b)s to use CITs, S.5139, the Empowering Main Street in America Act, was introduced in September by Senator Tim Scott, R-South Carolina, the ranking member of the Senate Committee on Banking, Housing and Urban Affairs. That bill and one introduced in the House of Representatives are a continuation of the effort begun in the SECURE 2.0 Act of 2022, but not included in final legislation, to enable 403(b) plans to invest in instruments beyond the annuity contracts and mutual funds to which they are currently limited.

In its letter sent last week, Great Gray Trust and its partners argued that CITs are regulated both by the Office of the Comptroller of the Currency and by the Employee Retirement Income Security Act, by nature of their use in DC plans.

“CITs often have lower fees and expenses than other pooled investment products like mutual funds and variable annuities,” Great Gray CEO Rob Barnett wrote in the letter. “At the same time, CITs offer enhanced investor protections because they are subject to a regulatory regime that is specifically designed for retirement plan investors. These advantages help explain why private sector retirement plans are increasingly selecting CITs over mutual funds and other investment products to help Americans grow their retirement savings.”

As of this year, CIT target-date funds “inched past” mutual fund TDFs by way of assets, according to data from Morningstar.

Barnett referenced the consumer advocacy groups’ letter, countering the idea that CITs would harm retirement savers with the argument that CITs would expand access to lower-priced options.

“Passage of the CIT Bill will remove a disadvantage, not create one, by giving 403(b) plans access to CITs, which private sector 401(k) plans have today,” Barnett wrote. “Providing 403(b) plans with much needed access to lower-cost CIT investments could boost the retirement savings of non-profit employees by tens or even hundreds of thousands of dollars over the course of their careers.”

Barnett also made the case that CITs, which are subject to ERISA, would come with “stringent regulatory protections” for the non-ERISA 403(b) plan space. A 403(b) plan should be allowed to make its own choice between “a lower cost CIT that is subject to ERISA over a higher cost mutual fund that is not subject to ERISA,” he wrote.

Attorneys from Covington & Burling and Groom Law detailed how CITs are regulated and administered as bank trust products. Covington & Burling sent a letter to individual senators, while Groom Law focused on Scott, the ranking member of the Senate Banking Committee, and its chair, Senator Sherrod Brown, D-Ohio.

The specter of regulatory review of CITs has been raised multiple times by the current head of the Securities and Exchange Commission, Gary Gensler. But Gensler announced his resignation for January 20, 2025, to coincide with the inauguration of President-elect Donald Trump.

The current Congress will have a final chance to pass pending legislation in its December lame duck session before the new administration and Republican-majority Congress take over on January 3, 2025.