Top of Mind

Collective Investment Trusts (CITs) and 403(b) Plans: An Update

Recently, we wrote a Top of Mind post about how the University of California (Cal) took the bold step of adding CITs to its 403(b) plans.  For decades, CITs have been the sole domain of annuities and mutual fund products.  As we noted, while it’s been known that CITs are a permissible investment in church plans, for non-church plans such as Cal, the opposite appeared to be the case. 

However, Bob Toth, who has written extensively on the 403(b)/CIT issue, may have solved the mystery in his latest Business of Benefits blog entry.  In his blog post, Bob warns that the analysis is a bit technical, and he is indeed correct!  But the bottom line appears to be the following:

It may be possible for CITs to be offered in a governmental 403(b) plan (the limitations on being able to offer CITs in a private tax-exempt 403(b) plan remain applicable, as described in my prior Top of Mind), if the following conditions are met:

  • The trust interests are not (i) advertised; (ii) offered for sale to the general public; and (iii) “fees and expenses charged by such fund are not in contravention of fiduciary principles established under applicable Federal or State law.”
  • The trust must be offered by a state-chartered trust company, NOT a national bank or trust company.

Does this mean that all governmental 403(b) plan sponsors should follow the lead of Cal and race to add CITs to their plans?  Well, no, because while it may be legal for CITs to be held in 403(b) plans, it does not necessarily mean that your recordkeeper can recordkeep CITs in your plan.  Also, as discussed in our Top of Mind on alternatives to mutual funds, CITs have disadvantages, chief among which is the fact that they are not publicly traded.

However, CITs do have enough merits, including lower fees than their mutual fund counterparts, which may be worth it for large governmental 403(b) plan sponsors to explore the concept with their recordkeeper(s) as well as counsel well versed in such matters. 

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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