Data & Research May 21, 2025

Proposals Suggest Redirecting DB Plan Surpluses to Boost Benefits, Raise Revenue

Two proposals from the American Benefits Council suggest ways to redirect some $100 billion in surplus funds from pension funds without terminating retirement plans.

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The American Benefits Council has proposed changes that would reshape how employers use otherwise unusable surplus assets in retirement plans, offering a win for employees and a revenue boost for the federal government.

Citing the rise in interest rates since the end of the COVID-19 pandemic, a rise which resulted in increased funded levels for the 100 largest corporate pension plans and a surplus of at least $62 billion in pension assets in the U.S. as of December 2024, according to data from Milliman, the ABC’s plans would avoid “a material incentive to terminate” pension funds.

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The ABC’s first proposal would permit surplus assets in a defined benefit pension fund to be transferred to provide contributions to participants in the employer’s defined contribution retirement plan without terminating the defined benefit plan. Such a use of plan assets is currently permitted only if the defined benefit plan is being terminated.

The second proposal would enable surplus assets in a plan sponsor’s retiree health account to be transferred and used to pay for other benefits, such as active employee health benefits.

Both proposals include the current-law protections for participants, including protections against reductions in health benefits for active employees or retirees and against reductions in contributions to defined contribution plans, according to information from the council.

The proposals were outlined in letters sent to the chairs of the House Committee on Ways and Means and the Senate Committee on Finance, Jason Smith, R-Missouri, and Mike Crapo, R-Idaho, respectively, on May 8.

Under current law, companies may use surplus pension assets for other benefits if they terminate the pension plan. The proposed framework, however, would allow the plan to continue operating while excess assets could be used toward employee 401(k) contributions or active employee health benefits. According to the council, these changes could unlock more than $100 billion in otherwise idle surplus assets.

“These proposals are a win-win approach for employees, employers, and taxpayers,” said Lynn Dudley, the council’s senior vice president for global retirement and compensation policy, in a statement. “They provide immediate benefits to workers while also raising billions in federal revenue.”

The federal revenue would come as a result of the fact that companies that have collected the surplus assets have already received a tax deduction. Therefore, using that money for other benefits forgoes a second deduction, creating a cost-saving mechanism for the federal budget. The council argued that this mirrors the effect of similar rules under Internal Revenue Code Section 420, which governs the use of surplus pension funds for retiree health care.

The proposals include protections to ensure employee benefits are not reduced as a result of surplus transfers. The protections would also include protections against reductions in health benefits for active employees or retirees and against reductions in contributions to defined contribution plans. These safeguards aim to preserve the integrity of both retirement and health plans while expanding flexibility for employers, according to the council’s materials.

The American Benefits Council has urged Congress to consider the proposals as part of broader fiscal policy efforts.
Compliance May 21, 2025

Bill Allowing CITs in 403(b) Plans Advances in House

Whether non-ERISA 403(b) plans should have access to invest in collective investment trusts was a point of contention during the House Finance Committee meeting.

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The U.S. House Committee on Financial Services discussed, during a Tuesday markup session, a bill that would allow 403(b) plans to invest in collective investment trusts.

The committee voted 43 to 8 to advance H.R. 1013, the Retirement Fairness for Charities and Educational Institutions Act of 2025. Representative Frank Lucas, R-Oklahoma, introduced H.R. 1013 in February, an act he argued would provide a “level playing field” between participants of 401(k) and 403(b) plans by allowing nonprofit workers to invest in CITs.

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Many in the retirement industry have pushed for allowing 403(b) plans to invest in CITs, as they 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.

At Tuesday’s hearing, Representative Stephen Lynch, D-Massachusetts, disagreed that the bill creates a level playing field and argued that because not all 403(b) plans are covered by the Employee Retirement Income Security Act of 1974, it would push “riskier investments” onto 403(b) plan participants.

Lynch introduced an amendment that would “create parity of protection for retirees in 403(b) plans as compared to 401(k) retirees” by allowing CITs and unregistered insurance-based products to be sold only to 403(b) plans that are subject to ERISA. The committee ultimately rejected this amendment.

Representative Ann Wagner, R-Missouri, defended the bill as introduced, arguing that it already requires an ERISA fiduciary, a state or local government entity, or an employer to take on fiduciary responsibility to oversee the plan.

“This does, indeed, align the treatment of 403(b) plans with what already works for 401(k)s,” Wagner said.

Lynch had argued that the bill does not level the playing field for retirees, but rather for product providers trying to sell the CIT products.

Representative Sylvia Garcia, D-Texas, agreed with Lynch that the bill puts 403(b) plan participants at risk, as she said more than half of 403(b) plans are not covered by ERISA.

“All in all, this bill would carve out over $1.1 trillion of retirement funds from federal oversight,” Garcia said. “This would constitute the single largest deregulatory action seen in years, and I must add that a hugely deregulatory action like this deserves a thorough scrutiny by this committee, as … we have not held a single hearing on this subject.”

Garcia said she would welcome a “detailed examination” into the products and practices that 401(k) plans use and follow, and said, “only after such serious inquiry should we offer [deregulating] 403(b) plans to be warranted.”

However, Lucas reiterated that nothing in the underlying bill mandates the inclusion of CITs in 403(b) plans, but merely provides access to these products under the full discretion of 403(b) plan sponsors. He said by excluding non-ERISA plans, the amendment would cause state and local governments, including public school teachers, to be singled out as employees without access to low-cost investments.

Lucas added that while CITs are not regulated by the SEC, the SEC would still regulate fraud and bring enforcement actions based on misleading information. In addition, he said the SEC would have full authority to regulate investment managers of these investments.

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