CITs: Coming Soon to 403(b) Plans?

The House Committee on Financial Services voted on Wednesday to advance the Retirement Fairness for Charities and Educational Institutions Act. The bill would amend securities laws such that collective investment trusts will be allowed in 403(b) plans.

The bill, initially proposed by Representative Frank Lucas, R-Oklahoma, passed the committee by a vote of 35-12. Lucas explained that his bill would bring parity between 403(b) and 401(k) plans. Lucas argued 403(b) plans are at an unfair and unjustified disadvantage relative to other plans, because they are not permitted to invest in CITs (which can be cheaper or more flexible to offer than mutual funds), which only serves to discriminate against teachers and charity workers who make disproportionate use of 403(b)s.

Representative Wiley Nickel, D-North Carolina, a co-sponsor of the bill, said there is “no reason that people teaching our children and caring for our sick should be paying millions more in investment costs than private sector employees.”

Lucas noted that the substance of the bill was present in the House version of the SECURE 2.0 Act of 2022, known then as the Securing a Strong Retirement Act, which was later bundled into the larger legislative package. The House version passed Ways and Means unanimously in 2022, but due to committee jurisdiction, Ways and Means was only able to amend the relevant tax law, not the securities laws, leaving CITs excluded from 403(b)s.

Representative Sylvia Garcia, D-Texas, offered an amendment to Lucas’s bill which was defeated 26-21. The amendment would have opened 403(b)s up to CITs, but only if they are ERISA-governed 403(b)s. She explained that in order to achieve true parity, 403(b) plans should have the same protections that 401(k)s have under ERISA, and allowing unregistered funds into non-ERISA plans would remove “meaningful safeguards.”

Lucas answered that 403(b) plans can offer many of the same investment products as 401(k)s and that non-ERISA 457s are not prohibited from using CITs either. He said debating which plans should be ERISA-governed is a separate debate and should not hinder passage of this bill.

The Investment Company Institute and the Insured Retirement Institute expressed strong support for the bill. The IRI said it would place nonprofit employees on a “level playing field,” and the ICI said it “would expand opportunities for American savers and investors.”

The bill must now pass the full House before advancing to the Senate.