On March 7, the U.S. House of Representatives approved a measure that would permit 403(b) retirement plans to include Collective Investment Trusts (CITs) within their plan. Collective Investment Trusts, in general, are pooled investment vehicles organized as trusts and maintained by a bank or trust company. The CITs are designed to facilitate investment management by combining assets from eligible investors into a single investment portfolio (or “fund”) with a specific investment strategy. This is important because CITs generally offer lower-cost investment menu options previously only allowed in 401(k) and Defined Benefit plans.
This provision was included in a Retirement Fairness for Charities and Education Institutions Act to amend the Expanding Access to Capital Act of 2023. The bill was passed with strong support by a vote of 301 to 125. The legislation hopes to complete what was started in the SECURE 2.0 Act of 2022 that would allow 403(b) plans subject to the Employment Retirement Income Securities Act of 1974 (ERISA) and governmental plans to invest in CITs. SECURE 2.0 opened the door for 403(b) plans to use CITs through changes in tax-related provisions, but it was not implemented as the provisions did not include the necessary changes to the securities provisions. [1]
Many in the retirement industry had pushed for a change to allow for 403(b) plans to invest in CITs post-SECURE 2.0, as the missing amendments to the securities provisions seem to be an oversight when the legislation was drafted. Hopefully, now with the passage within the House the Senate will follow suit and bring the provision to fruition to complete Section 128 of SECURE 2.0.
The growth in popularity for CITs is not surprising given consultant familiarity, pricing flexibility, daily valuation, improved reporting, and transparency because of compliance with the Department of Labor (DOL) and disclosure requirements under ERISA. [2] It only makes sense to expand this availability that is already offered in 401(k) plans to 403(b) plans and governmental plans. One of the positives of offering CITs within the retirement plan investment menu is the lower cost, especially in the era where there has been an increased focus on the fees of investment vehicles offered within a retirement plan. Should this pass through to the Senate, it will be interesting to see if there is increased adoption within 403(b) and governmental plans to help reduce investment costs within a retirement plan’s investment menu.
There are five amendments H.R. 2799, and the provisions to update to securities laws changes for CITs to be offered in 403(b) is one of those five. The other amendments of those five are expected to be voted through on Friday, March 8. We will be watching to see if this legislation continues forward to the Senate and, if passed, what the Senate’s final versions will look like and its potential impact on 403(b) retirement plans.
Notes:
[1] Section 3(c)(11) of the Investment Company Act of 1940 excludes from the definition of “investment company” a Collective Investment Trust that holds assets attributable to qualified plans, governmental plans, and church plans, but does not similarly exclude CITs that hold assets of 403(b) plans or other governmental plans or church plans. For this reason, Investment providers offering CITs will not offer them to 403(b) plans generally until Section 3(c)(11) is amended).
[2] 2015 Coalition of Collective Investment Trusts
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