Investing March 8, 2024

Measure Allowing CIT Use in 403(b) Plans Advances in the House

The legislation is a first step to allowing the lower-cost investments' use in nonprofits and school retirement plans.

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The U.S. House of Representatives Thursday approved a measure that permits 403(b) retirement plans to include collective investment trusts, a generally lower-cost investment menu option previously only allowed in 401(k) plans.

The Retirement Fairness for Charities and Education Institutions Act, an amendment to the larger Expanding Access to Capital Act of 2023, passed easily by a vote of 301 to 125. The section on the enhancement of 403(b) plans includes language that would amend “federal securities laws to allow 403(b) plans to invest in collective investment trusts (CITs) and insurance contracts that currently may be invested in by comparable retirement plans, such as 401(k)s.”

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The legislation aims to complete an effort begun in the SECURE 2.0 Act of 2022 to enable 403(b) plans subject to the Employee Retirement Income Security Act and governmental plans to invest in instruments beyond the annuity contracts and mutual funds to which they are now limited.

The measure passed this week was proposed in 2023 by Representatives Frank Lucas, R-Oklahoma, Josh Gottheimer, D-New Jersey, and Bill Foster, D-Illinois.

Lucas has argued that 403(b) plans, often used by nonprofits such as schools and charitable organizations, are at a disadvantage as compared with defined contribution plans such as 401(k) plans, 457(b) plans, and the federal Thrift Savings Plan.

Many in the retirement industry had pushed for allowing 403(b) plans to invest in CITs via SECURE 2.0, and while the needed tax-related provisions were included in that law, the securities provisions were not. There have since been persistent calls by industry groups such as the Insured Retirement Institute and the National Association of Plan Advisors for the law to be changed.

On Thursday, the Investment Company Institute praised the passage of the amendments in the act.

“These amendments will go a long way to meaningfully protect and strengthen Americans’ ability to secure their financial futures,” said Eric Pan, the ICI’s president and CEO, in a statement. “The Senate should pass this package as soon as possible.”

CITs can be cheaper and more flexible than mutual funds, in part because the instruments are not securities and therefore do not need to be registered with the Securities and Exchange Commission. Instead, CITs are regulated by the Office of the Comptroller of the Currency. CITs are not available as retail investments, and they tend to have lower costs based on requiring less administration, marketing and distribution infrastructure.

The investment vehicles have seen rapid growth in 401(k) plans in recent years, reaching $4.63 trillion in assets at the end of 2022 and surpassing mutual funds as the preferred investment vehicle for DC investment only asset managers, according to the most recent data from Cerulli Associates.

The act that passed Thursday is the third of five amendments to H.R. 2799, the Expanding Access to Capital Act of 2023, which is expected to be voted on in full on Friday. If passed, it would move to the U.S. Senate.

Administration March 7, 2024

Will DB Plan Sponsors With Overfunded Plans Consider Reversions?

Opportunities may arise for plan sponsors to take advantage of excess pension assets, but taxes must be considered. 

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Plan sponsor Eastman Kodak Co. last week announced it is outsourcing management of its defined benefit pension assets and said it was considering all possible opportunities for the company to take advantage of the excess funding, beyond what is estimated needed for benefits payments.

Kodak’s funded ratio stood at 145% as of June 30, 2023, up from roughly 93% a decade earlier. Kodak’s defined benefit plan is overfunded by approximately $1.2 billion, according to information that the company had provided last year to Chief Investment Officer, a sister publication to PLANSPONSOR. 

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While Kodak did not publicly confirm it plans a pension reversion, in which a plan sponsor takes ownership of excess pension assets, Bloomberg reported last week that a reversion transaction was under consideration.

U.S. corporate pension funds are at all-time high funding levels, driven by strong equity returns and elevated interest rates, according to several corporate pension trackers. With many of these pension trackers showing average funded status of the largest corporate DB plans as greater than 100%, discussions on how to manage that surplus are likely happening at many companies.

“U.S. corporate pension plans have maintained their overfunded status for 14 consecutive months since early 2023.” said Ned McGuire, managing director at Wilshire in the firm’s February U.S Corporate pension plan funding status update.

Tax Considerations for Reversions

Companies that undergo a reversion process could be subject to a 50% federal tax bill, which could climb as high as 80% to 90% of the pension surplus when adding local and state taxes, says Zorast Wadia, a principal in and consulting actuary at Milliman Inc.

Still, there are processes that would relieve a company of this tax burden during a reversion process, including using some of the surplus assets to increase benefits for plan participants and beneficiaries, Wadia says. Doing this could reduce the federal tax rate to 25%.

A company could also choose to share the entire surplus with its pension participants and beneficiaries, which would not subject the surplus to any tax.

Without these tax strategies, a reversion could simply be too costly. With a pension surplus of $1.2 billion, Kodak could forgo up to $960 million to taxes, assuming a tax rate of 80%.

Other Options?

Will more companies opt for pension reversions? Not likely, Wadia says, due to the significant tax hurdles.

Companies are more likely to reopen their DB plans, rather than undergo reversion, Wadia says.

“That’s not to say that sponsors adopting DB plans is going to happen en masse either, but I would think that it’s more likely for … the sponsor to restart the defined benefit plan, rather than focus on capturing the after-tax portion of whatever’s left of the regression.”

IBM announced in 2023 that it will end corporate contributions to the company’s defined contribution plan and instead reopen its cash balance defined benefit pension fund.

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