These Investments Are Cheaper and Better Than Mutual Funds – Center for Retirement Research

Opponents must not prevent 403(b)s from purchasing collective investment trusts.

Anyone concerned about payments to retirement plans should be happy that the use of collective investment trusts (CITs) that invest in the same assets as mutual funds has been growing among 401(k) plans (see Figure 1) and that the SECURE 2.0 law allows it. 403(b) plans to invest in CITs. (403(b) plans are retirement savings plans sponsored by public educational institutions, 501(c)(3) tax-exempt organizations, and other nonprofit organizations.)

Unfortunately, a group of organizations wants to ban CITs from 403(b)s. (For you lawyer types, while SECURE 2.0 amends the Internal Revenue Code to allow 403(b) investments in CITs, the securities laws also need to be changed. One such amendment comes from Section 205 of the Empowering Main Street in America Act of 2024. , currently under consideration by the Senate.)

My guess is that no one would disagree that CITs are less expensive than mutual funds of the same portfolio of securities. My friend Francis Vitagliano made me look into this issue two years ago. His argument was that 401(k) plans were paying the same fees of nearly $1 billion in transfer agent fees for services they already received through the recordkeeper.

How could that be? Here’s what recordkeepers do for 401(k) plans:

1. Maintain individual accounts – accept donations and process withdrawals.
2. Calculate and report the balance in each participant’s account daily.
3. Facilitate required program disclosures, such as on Form 5500.
4. Maintain the website and do all kinds of communication for the participants.

Transfer agent duties of each person investors in mutual funds include tasks #1 and #2 above – keeping an account and calculating daily balances. Since 401(k) plans have one omnibus account at each mutual fund company, the transfer agent performs tasks #1 and #2 for the whole systemwhile all processing of individual participants is done by the 401(k) record keeper. At the time, my estimate was that mutual funds were paying over $2 billion in transfer agent fees – more than Francis’ number! CITs do not pay a single transfer agent fee.

CITs are also cheaper than mutual funds because – sold only to retirement plans and other high-quality investors – they do not have to register under federal securities laws and thus avoid many of the regulatory costs associated with products offered to the general public.

CITs’ status under securities laws does not mean they are “unregistered financial products,” as opponents claim. CITs are held by banks and are therefore subject to banking laws governing CIT trustees. They are also subject to common law principles of fiduciary duty.

Even more interesting, if an ERISA-covered retirement plan invests in a CIT, the CIT manager is subject to ERISA’s fiduciary obligations. In other words, as long as one of the investors in the CIT is in the ERISA plan, all of the CIT’s assets will be treated in accordance with the ERISA fiduciary standard. That means that if a 403(b) plan that is not covered by ERISA (such as that for public school teachers) is invested in a CIT, that portion of the plan’s assets will benefit from ERISA protection. In short, CITs not only reduce the investment costs of retirement savings, but they can also extend ERISA’s fiduciary protections to non-covered plans. Opponents simply don’t have a case for trying to block 403(b)s from buying CIT assets. In fact, maybe we should also open up IRAs to CITs as a way to get ERISA protection for at least some of the assets in those high-income arrangements.