Collective investment trusts: Senate Committee introduces bill to allow CITs in 403(b) plans
There’s a push by Congress, spearheaded by ranking committee member Sen. Tim Scott, to include the ability for 403(b) plans to use the low-cost CIT investment options that many 401(k) plans use today.
Many retirement industry leaders are in favor of a new bill introduced by the Senate Banking, Housing and Urban Affairs Committee that will allow 403(b) plans to invest using collective investment trusts (CITs), which typically have cost-effective fee structures.
CITs are tax-exempt, pooled investment vehicles similar to mutual funds that are maintained by a bank or trust company exclusively for qualified plans, including 401(k)s and certain types of government plans. CITs and mutual funds account for 47% of all target-date strategy assets as of year-end 2022, according to Morningstar, which predicts CITs are on pace to overtake mutual funds as the most popular target-date vehicle in the next two years.
Sen. Tim Scott (R-SC), who is ranking member of the Senate Banking Committee, introduced the bill, which would expand 403(b) plan participants’ investment options, so they have greater parity with those available in 401(k)s and other plans.
The legislation follows unfinished business left over from the enactment of SECURE 2.0 Act of 2022. “Earlier versions of SECURE 2.0 included the ability for 403(b) plans to use the same, low-cost, collective investment trust (CIT) investment options that many 401(k) plans use today,” said Chris Littlefield, president of Retirement and Income Solutions at the Principal Financial Group.
In March, the House approved legislation to allow CITs in 403(b) plans. Also, a separate bill that would allow 401(b)s to include CITs was introduced in August by a bipartisan group of senators.
Consultants and advisors support the transition from target date funds provided through mutual funds to CITs, which is primarily due to CIT’s cost-effective fee structures, according to T. Rowe Price. CITs are considered a bank product – not a security – so they can be cheaper and more flexible than mutual funds.
Related: Target date funds: Plan sponsors adopting the lower-cost options for long-term investments
“There are over 15 million 403(b) plan participants that would benefit from gaining access to CIT investments in their plans,” said American Retirement Association CEO Brian Graff. “We will continue pushing Congress hard to get this done.”