"There is a pathway," said William Ryan, the Chicago-based partner and head of defined contribution plan solutions at NEPC LLC. "If you have more than $2 billion in assets, I would kick the tires on this."
Mr. Ryan said perhaps 1% to 2% of all 403(b) plans might be able or are interested to pursue creating a white label separate account containing pooled investments that aren't available to others outside of a specific sponsor and aren't considered investments requiring SEC registration.
"We see an opportunity to invest in group trusts that are not collective investment trusts," said Marla Kreindler, a Chicago-based partner at Morgan Lewis & Bockius LLP, who declined to discuss clients or the potential market for non-CIT group trusts.
The payoffs as compared to mutual funds are fewer regulatory and marketing expenses, greater flexibility in negotiating fees and the strong — although not automatic — opportunity for lower fees.
Investment managers interested in creating such non-CIT group trusts must navigate the prohibitions and exceptions of the Investment Company Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934. Two sections of the Investment Company Act allow them to develop non-CIT group trusts that 403(b) sponsors could use in their white label separate accounts. (Hedge funds and private equity funds follow these provisions for their investments that are not registered with the SEC.)
The SEC has issued no-action letters describing its stance on creating non-CIT group trusts. These letters are SEC responses to requests seeking to make sure that these investment vehicles don't violate securities laws.
In these letters, the SEC gave petitioners the OK to offer group-trust investments if they followed guidelines regarding investment options, the role of plan trustees and asset allocation. Key requirements include making sure a plan would be deemed a "single beneficial owner" of the group trust and that participants shouldn't play a role, offer an opinion or consult in the selection of investments.
"No-action letters are broadly applicable," said Lance Dial, a Boston-based partner for Morgan, Lewis & Bockius LLP. These letters serve as guidance and can serve as precedent, removing the need for the filing of separate requests by interested parties, he said.
By contrast, private letter rulings from the Internal Revenue Service apply only to the company or organization seeking an IRS opinion. The University of California successfully sought a private letter ruling on its way to offering CITs in 2017 in its 403(b) plan.
Ms. Kreindler said it could take up to six months for a 403(b) plan to establish a non-CIT group trust. For certain sponsors, which may offer other DC plans as well as 403(b) plans, the process could require less time because plan fiduciaries are familiar with the mechanics of setting up a white label investment, she said.
"We have the tools," said Ms. Kreindler, noting that sponsors may have fiduciary concerns and cost concerns that would dissuade them. "It depends on how ready and willing the sponsors are to engage."
