Compliance May 25, 2023

CITs: Coming Soon to 403(b) Plans?

A bill approved by the House Committee on Financial Services would permit CITs in all 403(b) plans to bring parity with other tax-privileged plans.

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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.

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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.

Data & Research May 25, 2023

Labor Demand Outweighing Recession Fears for SMBs

Business confidence is down among small employers. But 401(k) and other benefits are likely to remain amid long-lasting tight labor market, according to CBIZ.

 

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Small and medium-sized businesses are feeling the squeeze of months of high borrowing costs and inflation. But with employee attraction and retention ranking as their biggest concern, it’s unlikely they’ll look to employee benefits such as retirement saving plans for cutbacks, according to financial services and advisory firm CBIZ Inc.

CBIZ’s Main Street Index, released Wednesday, found waning of confidence among employers with 100 or fewer employees, with the firm’s Main Street Index dropping to 60.62, down more than 7 points from the previous quarter.

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“The Main Street Index is all pointing to a recessionary trend,” says Anna Rathbun, chief investment officer of CBIZ Investment Advisory Services. “Compared to the last two quarters, things are not looking as rosy.”

The current market environment is creating squeezed margins for many businesses that are leading to cutbacks, Rathbun says. That tightening, however, is happening as employers are concerned about hiring and retaining employees amid a tight labor market. Almost half of respondents (48%) listed employee retention as a top concern, up 25% from Q1, according to CBIZ.

That need to retain workers will likely mean employers will continue to maintain retirement saving and other benefits they see as important to keeping talent, Rathbun says.

“It’s a very unique situation where this may not look like a classic recession,” she says. “You see people having massive layoffs in some areas, and then on the other hand, they are trying very hard to retain employees.”

Rathbun says wages and benefits like 401(k) matching are likely not going to be areas where businesses cut, because they need employees to keep operating, which is not a given in the current environment.

“If you have to deal with shortage of labor supply and you need to keep wages competitive and lure people into working for you, you have to find cost-cutting elsewhere,” she says. “This is a very challenging environment for small and medium-sized businesses.”

Rathbun sees some of the long-term labor tightness as a result of changes to the mentality of the workforce since the pandemic, including people job-hopping or parents deciding they like to be home more and finding other workplace options.

“You have a labor shortage and demand mismatch,” she says. “The labor market issue that we are seeing is secular, it is structural. … It might be here to stay during both boom times and down times.”

CBIZ’s business confidence survey was conducted between April 24 and May 5, with responses from 753 businesses that have fewer than 100 employees.

 

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