A couple of years ago, I noted in a blog the legal challenges of offering to 403(b) plans the type of collective trust investments are sold to 401(k) plans. This can be very diffiuclt-if not virtually impossible- to do because of the way the technical rues apply.
The University of California made news when it announced that it has found a way to apply the collective trust rules in such a way to make just such an offering to its 403(b) plan. I was not involved with its development. However, if they did what I think they did, it really does speak to the sophistication of their counsel AND the hoops through which one must jump in order to make it happen. The downside to this is that it still does not “crack the nut” to make CIT’s available on a bulk basis as 81-100 trusts for unrelated employers. But it still is pretty cool.
It is possible they could have done something like the following. Make sure you have a copy of your US Code handy (or at least you’ve pulled up the Cornell’s on-line US Code tool). Its complicated. Or, as they say, don’t try this at home…..
403(b)(7)(C) requires that a custodial account hold shares of a “regulated investment company” (or a “RIC”) as defined in Code Section 851(a). 851(a) actually has thee different types of RICS. Two of them are under 851(a)(1), which are your run-of-the-mill mutual fund and a unitized investment trust (for example, a 403(b) annuity contract uses the unitized investment trust version of a RIC). My earlier blog focused on these two types, because that is what is typically offered in the marketplace.
However, 851(a)(2) permits a third type of RIC. An 851(a)(2) RIC is a common trust fund “or similar fund” which is otherwise excluded from the definition of a RIC under 15 USC 80a-3(c)(3) (which is part of the Investment Company Act of 1940, which regulates investment companies). 80a-3(c)(3) excludes a common trust from the definition of RIC (for that section’s purposes, but not for 403(b)) as long as 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.”
In order to qualify use this type of RIC as a 403(b) regulated investment company, the common trust also cannot be included in the definition of “common trust fund”under Code Section 584(a) (per Code Section 851(a)(2)). 584(a) does NOT include state chartered trust companies, it only covers national banks and trusts.
What does this all mean? It means that as long as the CIT is offered by a state chartered trust company, and meets the 80a-3(c)(3) limitations (and the other limitations under 851) explained above, the interests in the trust can be purchased by a 403(b) custodian.
Add to this the fact that the UC plan is a governmental plan, the CIT interests would be exempt from registration under the Investment Company 40 Act-meaning no prospectuses, proxies, or other such requirements the typical mutual fund or registered annuity contract must provide. The plan’s 403(b) custodial account could then hold the interests in that CIT.
There’s even a PLR on it; PLR 8003155.
Even if this is not what actually happened, (and there are a number of details and legal issues which needed to be resolved in order to actually make this work), it could be something close to this. For sophisticated state universities with large plans, or even those large consolidated K-12 plans, this could be a very real option. I suspect we’ll be seeing more of the same.
My hat’s off to the folks who put it together!