(b)lines Ask the Experts – ETFs in a 403(b) Plan

Michael A. Webb,Vice President, Retirement Plan Services, Cammack LaRhette Consulting, says:

First of all, let’s assume the 403(b) plan is NOT a church plan utilizing a 403(b)(9) Retirement Income Accounts; since such plans are generally unrestricted in terms of investments that can be offered. However, in church plans that do NOT utilize 403(b)(9) Retirement Income Accounts, as well as non-church 403(b) plans, investments are restricted to two types: 1) 403(b) annuity contracts, and 2) 403(b)(7) custodial accounts (more commonly known as mutual funds).

According to the SEC (see Exchange-Traded Funds; Proposed Rule 17 CFR Parts 239, 270 and 274, March 18, 2008) ETFs are a type of mutual fund which is registered with the SEC under the Investment Company Act of 1940, which is the same definition the Code uses to determine whether an investment qualifies under 403(b)(7) (see Code Section 403(b)(7)(C), which references Section 851(a) of the Code which refers back to the Investment Company Act of 1940). However we should note it should be confirmed with the ETF provider that the ETF in question is a Registered Investment Company (RIC) under Section 851(a) of the Code, since it is our understanding that it is possible that an exchange-traded fund which is registered with the SEC is not a RIC under the Code.

Thus it would appear that most exchange-traded funds can indeed be offered in 403(b) plans. However, as a practical matter, ETFs rarely appear in 403(b)s at present. The reason for this is that, unlike traditional mutual funds, ETFs are not daily valued; instead they are continuously valued throughout the day, which creates issues with standard retirement plan recordkeeping platforms, which were designed for daily-valued investments.

Though some inroads are being made onto recordkeeping platforms in the 401(k) arena, 403(b) ETFs at present appear to be limited to a few self-directed brokerage accounts within 403(b) plans, as opposed to being a part of any 403(b) core investment offering.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.