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

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.”

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.