House bill would let 403(b) plans invest in collective trusts 

May 16, 2023

New bipartisan House legislation, the Retirement Fairness for Charities and Educational Institutions Act of 2023 (HR 3063), would make necessary securities-law changes so 403(b) plans could offer collective investment trusts (CITs). Before enactment of the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328), neither the Internal Revenue Code (IRC) nor federal securities laws allowed 403(b) custodial accounts to offer CITs. The SECURE 2.0 Act amended the tax law, but Congress couldn’t agree on the changes to federal securities laws, so CITs are still unavailable to 403(b) plans for the time being.

Widely used by 401(k) plans, CITs are a type of pooled investment vehicle similar to mutual funds. However, CITs bear some notable differences:

  • CITs are generally exempt from the securities-law registration requirements applicable to mutual funds.
  • IRS revenue rulings limit participation in CITs to certain kinds of tax-exempt retirement plan investors, whereas mutual funds are available to institutional and individual retail investors.
  • The underlying investments held by CITs are considered ERISA “plan assets.” As a result, CIT sponsors and managers are ERISA fiduciaries (even if some investing plans aren’t subject to ERISA).

These and other factors can make CITs a more cost-effective option than traditional mutual funds for defined contribution plans to offer.

The bill would specifically amend relevant securities laws to permit 403(b) plans to invest in CITs if the plans are any of the following:

  • Subject to Title I of ERISA
  • Governmental plans
  • Sponsored by an employer that has agreed to serve as a fiduciary for selecting the plan’s investments

The bill would make similar securities-law changes for 403(b) plan investments in unregistered insurance company separate accounts. However, the IRC’s investment restrictions for 403(b) custodial accounts would remain in place.

The bill’s sponsors, including lead sponsor Rep. Frank Lucas, R-OK, all sit on the House Financial Services Committee, which could help move the legislation to the Senate. The outlook for final passage this year is uncertain, although the House and Senate have broad bipartisan support for creating parity between the types of investments available to 403(b) and 401(k) plans.

Related resources

Non-Mercer resources

  • HR 3063, the Retirement Fairness for Charities and Educational Institutions Act of 2023 (Congress, May 2, 2023)
  • Div. T of Pub. L. No. 117-328, SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)

Mercer Law & Policy resources