Collective investment trusts: House bill advances to allow lower-cost funds in 403(b)s

The House Financial Services Committee passed legislation that would allow employees of nonprofit charities and public education institutions in 403(b) plans to have access to the same investment options available to employees of for-profit companies and other employers in 401(k) plans.

Sponsored by Rep. Frank Lucas, the “Retirement Fairness for Charities and Educational Institutions Act of 2023” paves the way for 403(b) plans to offer collective investment trusts (CITs) as an investment option to plan participants. CITs are tax-exempt, pooled investment vehicles maintained by a bank or trust company exclusively for qualified plans, including 401(k)s, and certain types of government plans. CITs are often a lower-cost option because they have fewer administrative and regulatory requirements. A recent report by Morningstar predicts CITs will overtake mutual funds as the most popular target-date vehicle in the next 2 years.

Related: Target date funds: Plan sponsors adopting the lower-cost options for long-term investments

“We have for too long limited the investment options made available to public servants, and this bill will allow for much-needed consistency across retirement plans,” Lucas said during remarks before the committee. He pointed to research by the Investment Company Institute that found over the past 10 years total assets in 403(b) plans increased by only 46%, while 401(k) plan assets increased by 88% and government 457(b) plans increased by 82%.

“The disparity is truly astonishing and underscores the importance of putting 403(b) plans on the same playing field with other retirement plans,” said Lucas.

The committee passed the amended version of H.R. 3063 by a vote of 35-12 in a markup vote Wednesday. The bill now moves to the full House for consideration.

The House version of what became the SECURE 2.0 Act of 2022 included a provision allowing CITs in 403(b) plans, but only part of that solution made it into the final bill when it was enacted in December.

“This measure originated in SECURE 2.0 last Congress, which passed the Ways and Means Committee unanimously under Chairman Richard Neal,” said Lucas. “The SECURE 2.0 Act that ultimately became law included the required changes to the tax code but not the necessary changes to securities law.”

The action generated positive feedback from around the retirement industry.

“This bipartisan bill will put millions of teachers, hospital workers, clergy, and non-profit employees participating in 403(b) retirement plans on a level playing field with all other retirement savers,” said Insured Retirement Institute Chief Government and Political Affairs Officer Paul Richman. “Participants in 403(b) retirement plans deserve full parity with all other retirement plan participants. The changes to federal securities laws proposed in the bill will provide that parity. The legislation will give 403(b) plan participants a choice of more robust investment lineups consisting of lower-cost options that preserve principal and provide protected guaranteed lifetime income.”

 Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.