Legislation proposed by Representative Frank Lucas, R-Oklahoma, would amend several securities laws to permit collective investment trusts to be used in 403(b) plans for the first time.
The SECURE 2.0 Act of 2022 updated tax law to permit CITs into 403(b)s, but it did not update the necessary securities laws to do the same. Without both changes, CITs cannot be used in 403(b) plans. CITs are similar to mutual funds but, due to lower regulatory requirements, tend to have lower fees.
Lucas’ bill would specifically amend the Investment Company Act of 1940, the Securities and Exchange Act of 1934 and the Securities Act of 1933 to permit the use of CITs by 403(b) plans.
CITs and mutual funds are both pooled investment vehicles that follow stated investment objectives and strategies, but CITs are not subject to the prospectus and financial reporting requirements or the expense rules of securities laws.
The provisions of SECURE 2.0 that would have permitted CITs in 403(b)s originated in the House Committee on Ways and Means, but the House Committee on Financial Services asserted jurisdiction over the securities law aspect of the changes, and some committee members had concerns about the changes. Ultimately, there was not enough time to pass both sets of amendments before the new Congress was sworn in.
The Financial Services Committee chair is now Representative Patrick McHenry, R-North Carolina, which may improve the provisions’ odds of final passage, though the concept of harmonizing 403(b) and 401(a) plans has broad support.
David Ashner, an ERISA attorney with Groom Law Group, says the Lucas bill would update all three laws necessary to make this correction and allow CITs to be used by 403(b)s. He says “there is nothing missing here,” and the bill as written would complete a very popular objective of the SECURE 2.0 project that did not find its way into the December 2022 legislation.
Robert Abramowitz, a partner in the Morgan Lewis law firm, says updating all three acts would remove any ambiguity about whether CITs are permitted investment structures for use in 403(b) plans, and this should be the final act required.
403(b) plans are currently the only tax-preferred retirement plan that does not have access to CITs. Ashner says of the tax law changes that the “whole point of this is to get parity” between different defined contribution-style retirement plans.
Lucas’ office did not return a request for comment.