By Randy Myers
Participants in 403(b) retirement savings plans still don’t have access to something offered in 401(k) plans for years: collective investment trusts. But that could soon change.
Collective investment trusts, or CITs, are pooled investment funds that operate much like mutual funds but are not regulated by the Securities and Exchange Commission. They are popular in 401(k) plans because they often can be operated at low cost. Importantly for the stable value industry, CITs—unlike mutual funds—can incorporate stable value funds in their portfolios.
Restrictions under both securities and tax laws have precluded 403(b) plans, which serve employees of public institutions likes schools and hospitals as well as some charities, from using CITs. The SECURE 2.0 Act of 2022 amended the Internal Revenue Code to permit their use in 403(b) plans, taking care of the tax law hurdles, but didn’t address the securities law issues.
In March, the U.S. House of Representatives passed a bill to make the requisite changes to securities laws. Similar legislation was introduced in the Senate in late July by several members of the Senate Banking Committee and included in a broader capital formation package introduced by Ranking Member Sen. Tim Scott (R-SC).
Speaking at the Stable Value Investment Association’s 2024 Fall Forum in October, Carol Danko, vice president, government affairs, at Prudential Financial, said she was hopeful the Senate bill could pass, and the 403(b) legislation be enacted into law, by the end of 2024.
“We are aggressively pursuing a multi-prong strategy to get this passed,” Danko said. “Part one is to get more Democratic support in the Senate. The second prong is to find a vehicle on which this bill can ride … whether it’s the defense authorization bill or an end-of-year spending package.”
“I share Carol’s optimism,” said Kendra Isaacson, a principal in the Insurance, Retirement and Healthcare practice at Mindset, a bipartisan public policy consultancy. Isaacson joined Danko in a panel discussion led by Lacy Lockward, vice president and head of stable value at Prudential and chair of the SVIA.
Danko and Isaacson also updated Fall Forum attendees on several other legislative and regulatory initiatives aimed at strengthening the U.S. retirement system, including helping Americans convert retirement savings to a secure stream of lifetime income.
On the lifetime income front, the U.S. Department of Labor’s ERISA Advisory Council chose lifetime income and qualified default investment alternatives (QDIAs) as study topics for 2024. The Council recently took testimony on lifetime income in advance of delivering a report and recommendations to the Department of Labor. While Isaacson said she couldn’t predict what the Council would say, she noted that its reports help inform the work of Congress. That said, she shared a slide noting that the Council has studied income replacement from defined contribution plans six times since 2007.
Isaacson noted that the SVIA submitted a comment letter to the ERISA Advisory Council that recommended extending current QDIA safe harbor status to stable value investments for specific age cohorts. The SVIA also recommended extending safe harbor status to existing QDIAs that use stable value as a principal preservation tool for retirement plan participants in or near retirement.
In addition, the General Accounting Office recently released a study about the importance of safeguarding retirement assets from volatility.
“I think there is going to be a lot more work on lifetime income (in Congress),” Isaacson said. “I am aware of a bipartisan Senate group working on a lifetime income bill, and hopefully we’ll see that soon. Hopefully they’re going to make a nice role for stable value.”
In the meantime, progress on the Improving Disclosure for Investors Act appears to have bogged down, Danko said. The bill would require the SEC to propose rules allowing for the electronic delivery of regulatory documents to investors. Bipartisan support for the legislation is not as strong as it is for the 403(b) legislation, Danko noted, but she wasn’t willing to rule out a future for it, perhaps as part of a larger piece of legislation on capital markets. The House has already passed electronic delivery legislation as part of the larger Expanding Access to Capital Act of 2024.
“I think it looks promising,” Isaacson said.
Elsewhere, the Department of Labor’s final fiduciary rule, which expanded the scope of investment advice subject to ERISA, has been bogged down in legal challenges in Texas, where the presiding judges, Isaacson said, have made it clear they are likely to rule in favor of the plaintiffs. The Department of Labor, she anticipates, would appeal a court decision against the new rule, which was just issued in March.
“We’re going to be litigating this (rule) and talking about it for a long time,” she predicted.
Asked how the retirement landscape might change if former President Donald Trump won the presidential election in November, Danko said a Trump victory might lead to a less aggressive regulatory environment around issues like environmental, social and governance investing; diversity, equity and inclusion; and the fiduciary rule. She added that a second Trump administration also might revisit modernizing the Department of Labor’s Interpretive Bulletin 95-1, which outlines fiduciary standards for choosing an annuity provider for a pension risk transfer. She said it also might “pull back” the Qualified Professional Asset Manager Exemption, which allows certain transactions involving employee benefit plans and individual retirement accounts to proceed without violating ERISA.
Overall, Danko predicted that with millions of baby boomers turning 65 each year Congress will continue to have an appetite for retirement-related legislation, including, perhaps, a SECURE 3.0 bill that would address lifetime income solutions. Isaacson also anticipates possible tweaks to the federal Savers Match program for low- to moderate-income workers that was included in SECURE 2.0. And she predicted that the ranking member of the House Ways and Means Committee, Rep. Richard Neal (D-MA), will continue to push his “automatic IRA” legislation that would expand retirement coverage for millions of workers at small businesses, as well as gig workers and independent contractors.
Finally, Isaacson said there may yet be further attempts in 2025 to convert all retirement savings plans to Roth plans funded with after-tax dollars, given that “the entire tax code (will) be up for debate” with the scheduled expiration of many of the tax cuts included in the Tax Cuts and Jobs Act of 2017.
One positive that retirement legislation has going for it, Isaacson said in conclusion, is that it often draws bipartisan support.
“People like to work together,” she said, “and I really think that’s because everybody wants to retire at some point. Maybe the paths are a little different to get there, but … everyone shares that objective.”
