The retirement industry’s effort to have 403(b) plans offer collective investment trusts looks like the political version of the famous Peanuts cartoon featuring Lucy, Charlie Brown and a football.
Lucy holds the football. Charlie Brown tries to kick it. She pulls the ball away at the last minute.
After several years of lobbying Congress, retirement industry trade groups thought they had a breakthrough with the retirement security package SECURE 2.0, which, among other things, made enhancements in the use of auto enrollment, annuitization and linking corporate retirement plan matches to student loan payments.
But with Congress playing Lucy and the 403(b) plans playing Charlie Brown, the retirement industry kicked and missed when the legislation didn’t provide all of the help sought by 403(b) plans.
The House and Senate agreed in late December on tax code revisions to help 403(b) plans, but they couldn’t agree on changing sections of three securities laws that would have allowed 403(b) plans to offer CITs, which are available to other types of DC plans and some 403(b) church plans.President Joe Biden signed SECURE 2.0 on Dec. 29.
Like executives of other DC plans, the 403(b) plans view CITs as providing more choices for participants, fewer regulatory compliance and marketing costs, more flexibility for sponsors to negotiate fees and the potential for lower fees compared to mutual funds.
Mutual funds are registered investment vehicles under the Investment Company Act of 1940 and are regulated by the Securities and Exchange Commission. CITs are bank products offered by a bank or trust company and governed by the Office of the Comptroller of the Currency and state banking regulators. CITs are considered unregistered securities.
Because Congress doesn’t move quickly on retirement legislation, industry experts and consultants doubt there will be a quick resolution, thus leaving 403(b) plans to watch from the sidelines.
The disputed sections in the Investment Company Act of 1940, the Securities Act of 1933 and the Securities Exchange Law of 1934 are governed by the Securities and Exchange Commission, which cannot simply change its rules.
“You need legislation,” said Michael Kreps, Washington-based principal and co-chair of retirement services at Groom Law Group. Predicting that legislators are “not ready to jump back in” to dealing with more retirement issues, “it could be awhile” for any help to 403(b) plans, said Mr. Kreps during a Jan. 10 webinar sponsored by the National Association of Defined Contribution Government Administrators Inc.
“SECURE 2.0 was allegedly a slam dunk,” said William Ryan, the Chicago-based partner and head of defined contribution plan solutions at NEPC LLC, expressing disappointment that CITs failed to cross the finish line for 403(b) plans and wondering when Congress might try again.
“It took four years to go from SECURE 1.0 to SECURE 2.0,” said Mr. Ryan, noting that those laws were achieved through bipartisan support. With divided government, “it could be a decade” before the law is changed, he said.
Congress’ inaction was painful to watch for 403(b) plan executives as other DC plans have expanded their use of collective investment trusts.
CITs have taken increasing percentages of retirement plan assets in 401(k) plans, although mutual funds still dominate.
For example, the Investment Company Institute’s 2022 company fact book reported that CITs accounted for 27% of large 401(k) plan assets in 2020 — the latest data available — compared to 6% in 2000 and 11% in 2010. ICI defines a large plan as having 100 or more participants.
Morningstar Direct has tracked CITs taking an ever-larger piece of target-date series assets compared to mutual fund-based target-date series.
According to the latest available data, CITs accounted for $1.48 trillion in target date assets in 2021, or 45% of the market, compared to mutual-fund based target assets of $1.79 trillion. CITs represented 43% of the target-date market in 2020, and their percentage has gained every year since 2014 when they accounted for 18%.
“Collective investment trusts are on pace to overtake mutual funds as the most popular target-date vehicle in the coming years,” a March 2022 Morningstar report said. “In 2021, CITs accounted for 86% of target-date strategy net inflows.” In 2021, among net contributions to target-funds, CITs added $146 billion while mutual funds added $24 billion.
With numbers like these, it’s no surprise that 403(b) plans want to offer CITs. For now, 403(b) plans remain restricted to offering mutual funds and annuity products.
Consultants and providers said there is clear pent-up demand by 403(b) plan sponsors for CITs.
“We’ll see significant investments once they are finally approved,” said David Swallow, the New York-based senior managing director and head of consultant relations for TIAA-CREF. His organization has been talking to consultants for 18 to 24 months about CITs.
“Consultants are looking to add value to their clients,” he said. “Many are chomping at the bit to have this conversation.”
Sponsors who are using CITs in other DC plans, such as 401(a) plans, would be the most likely to provide CITs to the 403(b) plans, said Mr. Swallow, who declined to predict when Congress might act.
The prospect of CITs costing less than mutual funds makes them attractive to sponsors because “lower fees will mitigate litigation risk,” said Michael Volo, the Boston-based principal for CAPTRUST Financial Advisors. “Regardless of the segment in the non-profit world, everybody is focused on fees,” he said.
Mr. Volo said 403(b) plans will face the same challenges experienced by 401(k) plans and other DC plans in educating participants to overcome such concerns about CITs, such as the lack of stock-market ticker symbols for mutual funds and stocks.
Today’s CITs are more attractive than their predecessors. For example, they now offer more investments, greater transparency through improved data reporting, plus fund fact sheets and daily valuations.
Despite the changes in CITs, 403(b) plans “will have the same learning curve as the 401(k) plans,” said Mr. Volo, adding that 403(b) sponsors will be as deliberate in pursuing this opportunity as they have been in adding new plan features. “They won’t leap into CITs.”