I. Introduction
Defined Contribution (DC) plans—primarily 401(k)s and 403(b)s—now hold over $12 trillion in assets and have become the dominant way Americans save for retirement. Within these plans, Target Date Funds (TDFs) are the default investment option for most participants (QDIA). Increasingly, TDFs are being housed in Collective Investment Trusts (CITs) rather than SEC-registered mutual funds.
While many large financial firms market CITs as “institutional” or “low cost,” the truth, as Professor Natalya Shnitser (Boston College Law School) has documented, is that CITs operate in a poorly regulated gray zone. Her 2023 paper, Overtaking Mutual Funds: The Hidden Rise and Risk of Collective Investment Trusts, demonstrates how this parallel financial system has emerged largely outside of federal securities law, relying on weak or uneven state banking oversight that leaves participants vulnerable to undisclosed conflicts and high-risk investments. In May 2023, SEC chair Gary Gensler sounded the alarms on CITs:
Rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, [nor any] requirement for regular reporting on holdings to investors…”.
The Department of Labor’s EBSA has largely abdicated enforcement of investment-related fiduciary issues due to resource constraints and political pressure. Consequently, private litigation under ERISA has become the key mechanism for accountability. Under Cunningham v. Cornell, arrangements that embed undisclosed conflicts of interest can be litigated as Prohibited Transactions under ERISA §406, placing the burden of proof on the fiduciary to demonstrate that an exemption applies.
TDFs held in state-regulated CITs are therefore emerging as one of the most dangerous and least transparent areas in the retirement system.
II. The Regulatory Gap: State Trust Oversight and Hidden Alternatives
Shnitser’s analysis makes clear that while some CITs are administered by national banks subject to OCC oversight, many others are state-chartered trusts subject to fragmented and permissive regulation. These state agencies often lack capital markets expertise, do not require audited disclosures, and impose no meaningful restrictions on portfolio composition.
This weakness has allowed some CITs to quietly include or prepare to include assets that would be illegal or impractical in SEC-registered mutual funds, including:
- Private equity and private credit
- Illiquid real estate partnerships
- Annuity or general-account insurance contracts
- Cryptocurrency or blockchain-linked investments
Once these assets are admitted under state trust law, participants lose key protections of the Investment Company Act of 1940—including daily liquidity, mark-to-market valuation, and public reporting.
Even industry-cited CITs—such as those from Vanguard, Fidelity, or T. Rowe Price—may hold only transparent securities today, but the absence of federal oversight means that they could add higher-risk alternatives in the future without participant consent or public disclosure.
III. Fiduciary Exposure: Why This Creates a Prohibited Transaction Risk
Under ERISA §406(a) and (b), a fiduciary commits a Prohibited Transaction when plan assets are used for the benefit of a “party in interest,” or when the fiduciary engages in self-dealing or acts in a conflict of interest. Target date funds as default options (QDIA) have an even higher level of fiduciary exposure.
CIT structures create multiple layers of potential conflicts:
- Affiliated Fiduciary Self-Dealing – Many recordkeepers (e.g., TIAA, Prudential, Principal) both manage and distribute their own CITs. The plan fiduciary’s choice of an affiliated or revenue-sharing CIT is a per se conflict unless it qualifies for an exemption.
- Opaque Valuation and Fee Flows – Hidden sub-advisory, insurance, and wrap fees are common in hybrid CITs. Without SEC filings, participants and plan sponsors cannot verify total expenses or profit spreads.
- Commingling with Proprietary Insurance or Private Assets – When a CIT invests in an insurer’s general or separate account, plan assets are effectively transferred for the benefit of that insurer—a clear §406(b) violation.
As Cunningham v. Cornell established, once a plaintiff demonstrates the existence of a conflict, the burden shifts to the fiduciary to prove that the transaction was both reasonable and exempted by law. In the CIT context, that burden is nearly impossible to meet given the lack of transparency.
IV. The “Four Sets of Books” Problem
In a 2025 Commonsense401kProject article, “Four Sets of Books: How Trump’s 401(k) Push Opens the Door to Accounting Chaos,” the CIT TDF structure was shown to embed four separate accounting layers:
- Trust-level accounting – the CIT’s aggregate book, typically opaque.
- Sub-advisor books – alternative and private asset managers reporting unaudited valuations.
- Insurance affiliate accounts – general or separate account structures blending spread-based returns.
- Recordkeeper wrap or platform fees – compensation hidden in layered service agreements.
Each layer can obscure the true cost and risk exposure of plan assets, creating ideal conditions for spread extraction, kickbacks, or prohibited self-dealing.
V. Industry Narrative vs. Reality
Industry lobbyists and even members of the DOL Advisory Council have claimed that CITs are “federally regulated” under the OCC and therefore safe. Shnitser’s research, and my July 2024 testimony before the DOL Advisory Committee, dismantle that narrative. In fact:
- Many CITs are not OCC-regulated at all—they are state-chartered and subject only to weak local trust-law review.
- The DOL’s Advisory Opinion 2025-04A effectively greenlighted insurers and private-equity firms to use these permissive CIT vehicles to circumvent ERISA’s prohibited-transaction protections.
- As my Commonsense401kProject pieces show (“TIAA Leads the Way to 401k Target Date Corruption,” Sept. 22, 2025;https://commonsense401kproject.com/2025/09/22/tiaa-leads-the-way-to-401k-target-date-corruption/
“A Multi-Billion Dollar Gift to the Private Equity and Insurance Industry,” Sept. 24, 2025), these weak frameworks are already being exploited.
VI. Litigation and Enforcement Outlook
Litigators and whistleblowers can use Shnitser’s work as the academic and empirical foundation for a new generation of ERISA claims targeting state-regulated CITs.
Key claims include:
- Failure of prudence (§404) – Using opaque state-regulated CITs when transparent mutual funds are available.
- Prohibited Transaction (§406) – Affiliated, self-dealing, or revenue-sharing arrangements in proprietary CITs.
- Failure to monitor (§405) – Trustees’ inaction in the face of known regulatory gaps.
As with Cunningham v. Cornell, plaintiffs need only show the existence of conflicted structures; the defense must then justify them. Given the opacity of CITs, many fiduciaries will be unable to meet that burden.
VIII. Conclusion
Natalya Shnitser’s scholarship provides the intellectual and evidentiary backbone for understanding why state-regulated CITs threaten the fiduciary integrity of the U.S. retirement system. Combined with field evidence from the Commonsense401kProject, it shows that CIT-based TDFs have become the next frontier of prohibited-transaction litigation.
While some CITs—like those from Vanguard or Fidelity—may temporarily resemble their mutual-fund counterparts, the weak state controls allow hidden, illiquid, or high-risk alternatives to be introduced later.
When that happens, participants’ savings will be exposed to the same structural dangers—spread extraction, valuation manipulation, and self-dealing—that ERISA was designed to prevent. Expanding Shnitser’s framework and demanding transparency for CIT TDFs is not just good policy; it is essential fiduciary protection.
Natalya Shnitser Boston College – Law School November 2023 Overtaking Mutual funds the hidden rise and risk of Collective Investment Trusts https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4573199 pg.25
SEC May 2023 Gary Gensler https://www.sec.gov/newsroom/speeches-statements/gensler-remarks-investment-company-institute-05252023#_ftnref27
The CommonSense 401k Project 