OVERVIEW

A new bill introduced in Congress would allow 403(b) plans maintained by tax-exempt organizations to make use of collective investment trust (CIT) investments—an alternative to mutual funds that may provide significant cost savings for 403(b) plans and their participants. The recently enacted SECURE 2.0 Act took the first steps along this path by making amendments to the Internal Revenue Code to permit 403(b) plans to invest in these vehicles; however, that legislation failed to include the necessary changes to securities laws. The Retirement Fairness for Charities and Educational Institutions Act of 2023 (H.R. 3063, 118th Cong. 2023-2024) proposes to take the next steps by amending the Securities Act and the Investment Company Act to allow 403(b) plans to make use of CITs. CITs are already widely utilized as investments for 401(k) plans.

IN DEPTH

CITs, which are a type of common law trust, can have a number of advantages over mutual funds. Generally, CITs can be set up more quickly than mutual funds and can also be less expensive to maintain. In particular, CITs are structured to be exempt from registration as an “investment company” (whereas mutual funds must register as investment companies). Additionally, CITs have more streamlined governance than mutual funds. CITs can also hold a larger percentage of illiquid assets, such as restricted private equity interests or commercial real estate buildings, than a mutual fund. This can make CITs attractive to longer-term investors who do not need the daily valuations and redemptions of mutual funds. This is not to say that CITs don’t come with their own set of issues, including complex banking rules and ERISA-prohibited transaction restrictions, but 403(b) plan sponsors have long wondered why they could not take advantage of the greater flexibility and cost-efficient options that CITs may provide (just like their 401(k) plan sponsor counterparts who frequently use CITs).

The new bill seeks to give 403(b) plans the same registration exemptions that exist under securities laws for other types of plans (e.g., 401(k) plans, 457(b) plans and the federal Thrift Savings Plan) which in turn allow those plans to invest in CITs as well as unregistered insurance company separate accounts. Specifically, the bill would amend Section 3(e)(11) of the Investment Company Act so that the definition of an “investment company” would exclude a CIT that holds assets of a 403(b) plan.

The bill was introduced in early May by Rep. Frank Lucas (R-Okla.), Rep. Andy Barr (R-Ky.), Rep. Bill Foster (D-Ill.) and Rep. Josh Gottheimer (D-N.J.). It was referred to the House Financial Services Committee, which advanced the bill so that it can be considered by the full House. For tax-exempt organizations, such as health systems, charities and schools that sponsor 403(b) plans, the proposed legislation may bring new investment options and welcome relief from higher than necessary fees.