NCTR Supports CIT Legislation

February 14, 2025

FYI Week of February 14, 2025

NCTR has endorsed the “Retirement Fairness for Charities and Educational Institutions Act of 2025,” which would enable collective investment trusts (CITs) to be offered as governmental 403(b) plan investment options. In a joint letter to House and Senate primary sponsors of the legislation, NCTR and the National Association of Government Defined Contribution Administrators (NAGDCA) explained that CITs offer a sound investment option for public sector employees and that 403(b) plans should not be limited to offering only mutual funds and annuity contracts as investment options, as is the case under current law. Both associations believe the addition of CITs will help provide 15 million teachers, hospital workers, and other non-profit employees eligible for governmental 403(b) plans with the ability to save more in their defined contribution (DC) supplemental savings plans, which have been shown to be increasingly important to public employees’ overall retirement security.

The proposed legislation has recently been introduced in the Senate as S. 424 by Senator Katie Britt (R-AL) and in the House of Representatives as H.R. 1013 by Congressman John Lucas (R-OK). The Senate bill is cosponsored by Senators Gary Peters (D-MI), Bill Cassidy (R-LA), and Raphel Warnock (D-GA), while the House legislation is cosponsored by Congressmen Josh Gottheimer (D-NJ), Bill Foster (D-Illinois), and Andy Barr (R-KY).

CITs are tax-exempt, pooled investment vehicles, maintained by a bank or trust company, that operate similar to mutual funds. As the National Association of Plan Advisors (NAPA) explains, unlike mutual funds or Exchange-Traded Funds (ETFs) — which must register with the Securities and Exchange Commission (SEC) — CITs are regulated under the Office of the Comptroller of the Currency (OCC), a federal banking agency in the U.S. Treasury Department, as well as by state banking regulators.

“Since CITs are exempt from SEC registration requirements, they typically have lower fees than mutual funds,” NAPA points out. Also, NAPA underscores that CITs, “which are not retail products, also usually have lower administration, marketing, and distribution costs than retail products like mutual funds.”

Currently, CITs can be used by 401(k) plans, as well as 457(b) plans. However, Federal securities law effectively limits 403(b) plans to using only 403(b) annuity contracts and 403(b)(7) custodial accounts, also known as mutual funds.

The “SECURE 2.0 Act of 2022” attempted to change this situation by amending the Internal Revenue Code (IRC) to explicitly allow 403(b) plans with custodial accounts to invest in CITs. However, that law did not also change the provisions of securities law that prohibit such investments in most cases.

Therefore, the new Britt/Lucas legislation would amend the Investment Company Act of 1940, the Securities Act of 1933, and the Securities Act of 1934 to make the necessary changes to permit governmental 403(b) plans as well as those sponsored by other non-profit organizations, including public universities, hospitals, churches, and charities, to have access to such investment options.

Such changes to the securities laws have been previously approved by the House of Representatives. Specifically, Lucas, Gottheimer and Foster introduced their proposal in March of 2024 as an amendment to H.R. 2799, the “Expanding Access to Capital Act of 2023.” It passed by a vote of 301 to 125, and would have specifically permitted federal securities laws “to allow 403(b) plans to invest in collective investment trusts (CITs) and insurance contracts that currently may be invested in by comparable retirement plans, such as 401(k)s.” However, while H.R. 2799 passed the House last March, it was never taken up in the Senate.

NCTR and NAGDCA stress in their joint letter that “Governmental 403(b) plans offer workers who are the backbone of our society—teachers, healthcare workers, and other public servants—access to increasingly important supplemental savings vital to their overall retirement security, and they deserve access to all options to help these retirement savings grow as much as possible.”

Why is this so important?

Unfortunately, access to a defined benefit (DB) pension plan, Social Security (either directly or through a satisfactory Social Security replacement plan), and retiree healthcare “no longer guarantees a secure retirement for public workers given rising health costs and longer lives,” according to the National Institute on Retirement Security (NIRS). In fact, NIRS estimates that those in a typical public DB pension plan may need to save about four to six percent of their salary on their own to ensure adequate retirement income. (See NIRS: “The Real Deal for the Public Sector”)

Therefore, the efficiency and effectiveness of supplemental retirement savings vehicles such as 403(b) plans are increasingly important to overall teacher retirement security, particularly for women, workers in less generous tiers of benefits, and younger workers. This is the primary reason why NCTR supports access to CITs for 403(b) plans.

That is not to say, however, that 403(b) plans are without their issues, as a 2023 report by the U.S. Government Accountability Office (GAO) pointed out. For example, sponsors of government 403(b) plans are not subject to disclosures mandated by the Employee Retirement Income Security Act (ERISA) such as a fee comparison requirement. Also, while they may be subject to state laws on disclosures, these can vary significantly.

GAO therefore found that supplemental retirement savings accounts for teachers and non-profit workers “can sometimes be subject to excessive fees and limited oversight that could impact the amount retirees ultimately receive.” [For more on this, see NCTR’s coverage entitled “New GAO Report Warns of Significant Non-ERISA 403(b) Plan Shortfalls.”]

The Retirement Fairness for Charities and Educational Institutions Act has received significant support from other organizations as well as NCTR and NAGDCA. For example, Senator Britt notes in her press release accompanying the introduction of the legislation that it has also received support from the American Bankers Association; the American Benefits Council; the American Council of Life Insurers; the American Heart Association; the American Retirement Association; Aon; the Church Alliance; Great Gray; the Insured Retirement Institute; the Investment Company Institute the March of Dimes; MetLife; Mercer; Mission Square; the National Association of Insurance and Financial Advisors; the National Council of Nonprofits; Nationwide; Prudential; the SPARK Institute; the Stable Value Investment Association; United Way; and Vanguard.

The Britt legislation has been referred to the Senate Committee on Banking, Housing, and Urban Affairs, while the Lucas bill has been referred to the House Committee on Financial Services. In this regard, it should be noted that both Committees have jurisdiction over the Securities and Exchange Commission (SEC), which indirectly regulates governmental 403(b) plans through its regulation of fee disclosure for some vehicles that are offered as retirement plan investment options, including variable annuity products and mutual funds.

The SEC therefore works to ensure that broker-dealers and associated persons involved in the sales of 403(b) investment options comply with applicable federal securities laws and regulations and helps to ensure that the recommendations and actions of registered broker-dealers who may be selling those securities to 403(b) plan participants comply with all applicable requirements. For example, the SEC oversees whether conflicts of interest when a broker-dealer recommends a security are properly disclosed and reduced or eliminated, if necessary, in the sale of a security. The SEC also oversees whether fees in connection with the sale of a security are properly disclosed.

As the GAO report, noted above, points out, the SEC has accordingly filed numerous enforcement actions related to misconduct by 403(b) providers, including 2022 fraud charges against a life insurance company for providing account statements to about 1.4 million variable annuity investors that included materially misleading statements and omissions concerning investor fees. Additionally, in 2020, the SEC charged a financial services company for failing to disclose to teachers and other investors practices that generated millions of dollars in fees and other financial benefits for the company.

The point being that the House Financial Services and the Senate Banking Committees may not be as well-disposed toward 403(b) plans as the House Ways and Means Committee and the Senate Finance Committee were. Therefore, the new CIT legislation that has now been referred to these two Committee could possibly attract a renewed examination of 403(b) plans in general.

This in turn could lead to possible interest on the part of some, in the regulation of 403(b) plans that would impose Federal fiduciary standards and required disclosures. While the 2023 GAO report made no recommendations in this regard, calls for an extension of ERISA to this area of public plan operations have effectively been placed on the table by their report, as NCTR noted at the time.

Could this raise the question of where that extension of ERISA, once made, will stop?

Always something to worry about! That is why NCTR is there for you.