GOP Bill Introduced in Senate to Permit CITs in 403(b) Plans

The latest bill is one of several pending measures that aim to allow 403(b) plans to invest using the cheaper investment vehicle.

Several Republican members of the U.S. Senate Committee on Banking, Housing and Urban Affairs have introduced a bill that would allow 403(b) plans to invest using collective investment trusts—something many in the retirement industry have been pushing for because of the cost savings the CIT structure offers.

The provision is part of a broader bill, the Empowering Main Street in America Act of 2024, which aims to promote greater capital formation in U.S. public and private markets, expand investment opportunities for retail investors, foster investor confidence and hold regulators accountable through increased oversight.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

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 Banking Committee. Senators Mike Crapo, R-Idaho; Mike Rounds, R-South Dakota; Thom Tillis, R-North Carolina; John Kennedy, R-Louisiana; Bill Hagerty, R-Tennessee; Cynthia Lummis, R-Wyoming; Katie Britt, R-Alabama; Kevin Cramer, R-North Dakota; Steve Daines, R-Montana; and Jerry Moran, R-Kansas, are co-sponsors of the bill.

Under Title II (“Responsibly Expanding Investment Opportunities for Retail Investors”) of the bill, Section 205 would allow 403(b) plans to invest in CITs.

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.

A separate bill that would allow 403(b)s to include CIT investments was introduced in August by a bipartisan group of senators, including Britt, as well as Senators Gary Peters, D-Michigan; Bill Cassidy, R-Louisiana; and Raphael Warnock, D-Georgia.

Since being introduced, that bill, which reflects an amendment to the Retirement Fairness for Charities and Educational Institutions Act of 2024 (S.4917), has been read twice and referred to the Committee on Banking, Housing and Urban Affairs. The bill proposes to amend the Investment Company Act of 1940 to allow 403(b) plans, as well as certain 401(a) plans, governmental plans and church plans, to invest using CITs.

Similar to the Empowering Main Street in America Act, this bill also proposes to amend the Securities Act of 1933.

The Retirement Fairness for Charities and Education Institutions Act was an amendment to the larger Expanding Access to Capital Act of 2023, passed by the House of Representatives in March.

The various bills aim to complete an effort begun in the SECURE 2.0 Act of 2022 to enable 403(b) plans and governmental plans subject to the Employee Retirement Income Security Act to invest in instruments beyond the annuity contracts and mutual funds to which they are now limited.

Spokespeople for Britt and Scott did not immediately respond to requests for comment on the likelihood of either bill being passed in the House or Senate this year.

Rate Cuts Changing DC Investing Landscape

Experts at a PLANADVISER webinar highlighted the effects of interest rate cuts on stable value and money market funds.

With the Federal Reserve lowering the federal funds rate to a range from 4.75% through 5%, financial experts are predicting up to five more rate cuts to align with the market-driven two-year Treasury rate, which has dropped to 3.57%, Jeff Cullen, the CEO of Strategic Retirement Planners, noted during a PLANADVISER webinar held Tuesday.

The rate cut regime, Cullen noted, is just in time for stable value funds that, while historically popular in defined contribution retirement investing, have been hurt as investors turned to equally risk-averse money market funds.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“Just about every single stable value in the entire industry is underwater, and so rates coming down will be some much-needed relief for stable value funds, because they’re struggling,” he said. “Hopefully rates come down fast enough to save some of these stable value funds from blowing up. … For those of us that were doing this 22 years ago, I can tell you they can blow up, and I’ve seen it. It’s really ugly.”

Derek Fiorenza, the chief operating and chief commercial officer of Summit Group Retirement Planners Inc., noted that almost all the retirement plans his firm manages rely at least somewhat on stable value, particularly those that do not enforce “put,” which limits liquidity.

Ensuring the stability of these funds is crucial, Fiorenza said, with insurance quality and credit standing as top concerns. He explained that despite recent adjustments, most stable value funds remain well positioned, thanks to strong cash reserves.

Fiorenza also mentioned, however, that some of his clients continue to benefit from money market accounts, which have performed well in the current rate environment. Similarly, short-term investments, such as Treasury bills, have been advantageous for individual clients, and bank CDs have also provided a safe option. He provided a recent example in which a bank offered a teaser rate of 9.9% for six months, presenting unique opportunities in the short-term investment space.

Cullen of SRP noted to the online audience that the Fed typically lags market rates, with the current delay one of the longest such instances. He explained that while the fed funds rate is controlled by the Federal Reserve, the two-year Treasury rate is set by market forces, signaling that more rate cuts are already priced in by the bond market. Cullen highlighted that for investors, this means little incentive to hold long-term bonds, as the yield curve remains relatively flat.

“It doesn’t pay much to be in the aggregate bond index right now,” he stated, advising a barbell strategy in bond portfolios: focusing on short-term bonds with higher yields and a small allocation to long-term bonds as a hedge against equity volatility. He said this approach has been particularly successful since the Ukraine war began, offering protection from rate cuts while balancing risk in equity markets.

Tom Demko, a managing director at SageView Advisory Group, added that stable value funds could play a key role in asset allocation but may come with limitations, such as a lack of flexibility from recordkeepers.

More generally, Demko stressed the complexity of retirement planning decisions considering the shifting markets. He pointed out the need, in particular, for participants to carefully consider when deciding between pre-tax and Roth distributions, particularly for those nearing retirement.

“There’s no one-size-fits-all answer,” Demko said, emphasizing that each participant’s financial situation, investment strategy and the flexibility of their retirement plan should drive decisionmaking.

The full conversation can be viewed on demand.

«