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The University of California 403(b) Plan Changes: Can 403(b) Plans Now Invest in Collective Investment Trusts?

Robert Steyer of Pensions and Investments recently broke the story on the University of California becoming the first (of which we are aware) 403(b) non-church plan sponsor to offer collective investment trusts (CITs) in its 403(b) plan.  This development was somewhat surprising, given the fact that non-church 403(b) plans are generally restricted to investing in 403(b)(1) fixed/variable annuities and 403(b)(7) custodial accounts (more commonly known as mutual funds), and most CITs are neither.

So why did Cal decide that it was okay to add CITs to its 403(b) plan?  According to the article, the university obtained a private letter ruling from the IRS which is alleged to provide a specific exemption to Cal (private letter rulings only apply to the institution that requested the ruling, and cannot be relied on by other plan sponsors).  The problem is, no such private letter ruling in known to exist, and Cal would not provide a copy of the ruling to the article’s author.

However, one clue as to what the private letter ruling might contain is the statement in the article that the ruling was “not recent.”  In his excellent blog post on the subject, Bob Toth cites some older private letter rulings that potentially opened the door for 403(b) plans to purchase interests in CITs.  The one barrier to a 403(b) plan sponsor offering CITs is the securities law restriction that requires registration of the CIT; this presumably does not apply to a governmental plan sponsor, such as Cal.

However, Bob then returns to the Code issue restricting investments to 403(b)(1) and 403(b)(7), which does apply to Cal.  Bob cites a number of legal and practical hurdles to structuring a CIT to qualify as a 403(b)(7) custodial account.

Perhaps Cal has figured out a way to overcome these challenges, though the two Fidelity CITs being offered appear to be the standard Fidelity products.  And perhaps other large 403(b) plan sponsors will figure out a way as well.  But until that point, it remains prudent to seek the advice of legal counsel well versed in such matters before taking the plunge into CITs as a 403(b) plan investment.

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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