End of year passage of SECURE 2.0 legislation is poised to change the 403(b) investing landscape by enabling these previously ineligible plans access to collective investment trusts (CITs), which offer plan sponsors and participants lower costs and greater flexibility.
Today, Americans participating in workplace 401(k) plans are eligible to invest their retirement accounts in CITs that are exempt from the SEC’s registration requirements. Congress created this exemption because the employer screens the investments made available to employees in a 401(k) plan, so the law treats 401(k) investment options as institutional products for which registration is not needed, as opposed to retail products for which registration is needed. And because these products are exempt from SEC registration, they can be offered at a lower cost than other comparable investments, including mutual funds.
403(b) plans are similar to 401(k) plans in many ways, except that they may only be maintained by non-profit charities or public educational institutions. Although 403(b) plans were historically viewed as retail arrangements marketed directly to individual employees, 403(b) plans have in large part moved to being employer-provided arrangements equivalent to 401(k) plans by reason of changes in the law over many years.
Unfortunately, because of longstanding restrictions contained in the Internal Revenue Code and federal securities laws, 403(b) plan participants generally do not have access to the same low-cost investments discussed above. The Investment Company Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934 include registration exemptions for CITs solely for certain retirement plan assets, such as 401(k) plans. Those registration exemptions, however, have limited application to 403(b) plans.
Recognizing the changing statutory and regulatory environment for 403(b) plans and the need for parity and flexibility in investment offerings, Congress has included in its latest retirement legislation, SECURE 2.0, a provision that would extend the tax and securities exemptions applicable to 401(k) plans to 403(b) plans. If enacted, 403(b) plan sponsors would be able to offer lower-cost CITs to charities, governmental and educational institutions. That change will result in providing greater investment options to 403(b) plan sponsors that would in many cases lower the costs for investing for sponsors and, ultimately, participants, leading to greater retirement savings.
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Exp. Date: 10/31/2023