Consumer Advocacy Groups Push Back On CIT Use by 403(b)s

In a letter addressed to the Senate Banking Committee, six investor advocacy groups expressed their opposition to the Empowering Main Street in America Act of 2024, which includes a provision that would allow 403(b) plans to invest in collective investment trusts.

The bill, S.5139, would amend the Securities Act of 1933 and was introduced by Senator Tim Scott, R-South Carolina, the ranking member of the Senate Committee on Banking, Housing, and Urban Affairs, in September.

Under Title II (“Responsibly Expanding Investment Opportunities for Retail Investors”) of the bill, Section 205 would allow investment in CITs by 403(b) plans. CITs can be cheaper and more flexible than mutual funds, in part because the instruments are not securities and do not need to be registered with the Securities and Exchange Commission. Instead, CITs are considered a bank product and regulated by the Office of the Comptroller of the Currency.

The bill would also require the Department of Labor to study, and report to several congressional committees within a year, whether private placements—securities not issued in public markets—should be permitted in defined contribution plans or for retail investors.

The six investor groups—Americans for Financial Reform, Consumer Action, Consumer Federation of America, Institute for Agriculture and Trade Policy, Private Equity Stakeholder Project, and Public Citizen—argued in the letter that by eliminating the Security and Exchange Commission’s regulatory oversight, the bill would “open the door to unregistered financial products with hidden risks and costs being sold to some of the most vulnerable retirement savers.”

Because some 403(b) plans are not governed by the Employee Retirement Income Security Act, the advocates believe removing SEC oversight would put these plans and employees at further financial risk.

As a whole, the consumer advocates argued that Titles I and II of the bill would “severely threaten” the transparency, integrity and accountability of U.S. securities markets, placing millions of investors at risk. They also argued that the bill would expose more investors to the risks of “illiquid, opaque, high-risk and often predatory private markets.”

“While marketed as a ‘capital formation’ bill, this legislative package is really a recipe for capital destruction,” the letter stated.

A separate bill that would allow 403(b) plans to include CIT investments was introduced in August by a bipartisan group of senators, including Katie Britt, R-Alabama; Gary Peters, D-Michigan; Bill Cassidy, R-Louisiana; and Raphael Warnock, D-Georgia. Similar to the Empowering Main Street in America Act, the Retirement Fairness to Charities and Educational Institutions Act of 2024 proposes to amend the Securities Act of 1933.

These various bills are a continuation of the effort begun in the SECURE 2.0 Act of 2022 to enable governmental 403(b) plans subject to ERISA to invest in instruments beyond the annuity contracts and mutual funds to which they are currently limited.

The American Retirement Association and the Investment Company Institute have come out in support of Senator Scott’s bill.

A spokesperson for Scott did not immediately respond to a request for comment.