Let’s get more for less: a fresh look at CITs

We first met the insightful Angela Montez in 2019 as she was exploring and leaning into the retirement security space. Not surprisingly, she’s here with a great idea that Auto IRA and 403(b) afficionados may find both interesting and timely. Angela currently serves as a Special Counsel at Eversheds Sutherland (US) LLP, where she focuses her practice on retirement and investment policy and products, including ERISA and related federal tax and securities law issues and collective investment trust matters. (Everyone knows we love attorneys.) Angela brings more than 25 years of experience successfully serving as a key legal advisor in the financial services industry.   

Angela, tell us more, please!

I've been in retirement and financial services since I graduated law school back in ‘94. I joined Eversheds Sutherland in October as a Special Counsel in their Investment Services group. And before that I spent a little over 20 years in house at ICMA-RC, which is now MissionSquare Retirement, most recently as General Counsel and Chief Legal Officer. And I was an associate with Groom Law Group before that. Throughout my career I’ve focused on retirement and investment policy issues -- in particular matters under ERISA and related federal tax and securities laws, as well as governmental plan and collective investment trust matters. I'm a native Washingtonian (DC!) and I've lived here all my life except for college (Go Penn!). I brought my now-husband down here with me after college.

Excellent recruiting! We are excited to share your expertise, so let's start here. We recently had a conversation about CITs. What are CITs and why do they matter?

CITs are funds that are specifically designed for retirement plan investment and they're generally only available to certain qualified plan and governmental plan investors. You might also hear them called collective investment funds or collective trust funds. Like other pooled investment vehicles, they facilitate investment management by combining the assets of multiple investors. In doing so they achieve economies of scale that can enable lower expenses and access to more diverse or innovative strategies.

So, they generally offer access to the same types of investment strategies as you see in other funds at lower cost. They also enable access to a wider range of investment strategies and asset categories.

Recent studies by BrightScope, Cerulli, and Morningstar show that the use of CITs has really outpaced other types of funds -- particularly in the jumbo defined contribution plan space. They are dominant among these plans in the target date space. CITs have also accelerated both in terms of asset gathering and the number of CIT-based investment options available in 401(k) and other DC plans in general. So, they're really becoming the investment option of choice among defined contribution retirement plans.

Angela, you are talking about ERISA-qualified plans, so that means not all retirement accounts can use CITs, is that right?

That's exactly right. For a number of years, we've been working on efforts to make CITs available in 403(b) plans which, unlike 401(k) plans, or even governmental 457 plans, currently don't have ‘permission’ to use CITs. This is also true for state-based retirement programs.

No one wants to be left behind. How do you think CITs could be useful to state-based retirement savings programs, like Auto IRAs?

Well, allowing CITs to be used in these state-based programs would provide programs with access to a wider range of investment options and asset categories, including notably broader access to stable value investments. Stable value is a very standard offering in 401(k) plans which cannot be used by the state Auto IRA programs today, because stable value is often offered in CIT form, but not mutual fund form.

CITs might also give access to investments that provide exposure to alternative asset classes which have been shown to boost retirement savings returns in DC plans.

I think really most importantly, it would create parity for participants in the state-based programs with that of 401(k) and 457 plans. As I mentioned, we've been trying to work on this for 403(b) plan participants for a few years now. There's really no reason that that participants in 403(b) plans and state-based programs shouldn't have the same choice as their 401(k) and 457 counterparts when it comes to investment options.

The stable value - capital preservation space has been particularly challenging for state-based programs in this low interest rate environment. So that's important. What do you think needs to be done to change the availability of CITs for these programs?

I mentioned that governmental plans can have CITs among their investment options. But unfortunately, unlike 457 plans, these state-based programs aren't treated as governmental plan due to the federal securities laws, notwithstanding the fact that the state is actually sponsoring the program.

The issue here is really twofold. The first is that the exemption of the securities laws that CITs rely on provides an exemption for plans that are established and maintained by government for their employees. And here, the employees are actually employees of private sector employers. So they're not government employees. The second issue is that many of the programs are styled as payroll deduction IRAs, and CITs aren't available to IRAs either. And that's because typically IRAs are more retail-based retirement savings vehicles and CITs are institutional investments, and they're not generally available there.

In some ways, the state-based programs largely mirror the governance structures that make governmental plans, and other employer-sponsored programs eligible for the exemption. They operate a lot like other institutionally-governed retirement funding vehicles where the state or a state entity or instrumentality sponsors them and administers the program. States are also responsible for selecting the investment options that are available in these programs and for securing the payroll deductions that come over from the private sector employers, so they’re providing the same oversight and protections that you see in other contexts where the securities laws provide an exemption.

Based on this, we think that there's strong basis to push for no action relief with the SEC because the real issue here is that, absent a legislative fix, you need to rely on an exemption under the securities laws in order to allow CITs to be available within these programs.

Another alternative would be to change access using legislation, but that's always fraught -- particularly in this hyper-partisan era. SECURE 2.0 is coming down the pike and hopefully will be passed sometime this year (here’s the House version). The issue is that a lot of the bill’s provisions are already fully baked. So, it's not clear whether you could add CIT access for state-based programs at this late date to Secure 2.0, but trying to add it to existing legislation certainly could be an option. That would need to happen pretty quickly because the bill is probably ready to be considered in the first quarter or first half of 2022.

Angela, you are talking with folks who are interested in and/or support these sorts of changes. If someone wants more information or to get involved, what’s a next step?

To take action, folks can reach out directly to me. We're looking to put together a single issue coalition of stakeholders to help advance availability of CITs to state-facilitated programs. There's strength in numbers. So galvanizing a coalition is really the way to go.

For information about collective investment trusts, or CITs, in general, I encourage everyone to go to the Coalition of Collective Investment Trusts website. There's a lot of good information about the vehicle there.

CITs are having their heyday. Folks generally acknowledge that it's not a matter of if, but when, CITs will be made available to a wider range of institutionally-governed retirement and even healthcare savings programs. At this point the vehicle type has been fully vetted and the existing 401(k) and 457 space has really benefitted from these options. It's not clear why they should not be available more broadly to participants in all retirement and retiree health savings vehicles.

We’re hearing CITs offer lower cost, more flexibility, and access to underlying investments that otherwise aren't available through other types of funds.

That's exactly right. That's it in a nutshell.

Awesome. Are you ready for a fun question? If you had a chance to pick a superpower, which one would you want?

Superpower, wow, I'm going off the cuff here. I'd like to have the ability to see the future. I think it would be interesting to be able to see what's coming out of the pike and hopefully plan and avert disasters and make good things happen. So that would be the superpower I'd like to have.

We love that. We want that too.

Thank you so much Angela Montez for sharing thinking about this space and a simple improvement that could benefit many.

Want more? You can connect directly with Angela Montez by email here. You can follow Angela’s work at Eversheds Sutherland [add link/s if there is a good one]. You can also connect with Angela at LinkedIn.

This piece was featured in the January 27, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.