The House voted 295 to 128 on Wednesday to let eligible 403(b) retirement plans invest in bank-managed collective investment trusts and certain insurance company accounts. The bipartisan vote advances a measure that could widen investment menus for teachers, nonprofit employees and other workers whose employers offer these plans. It does not require any employer to add an investment or change what workers may contribute.

The Retirement Fairness for Charities and Educational Institutions Act, H.R. 1013, would amend federal securities laws to make those options available under specified conditions. The House vote is one step toward enactment. The Senate has not passed the measure, and employees’ existing plan choices do not change as a result of Wednesday’s vote.

Why the plans have different investment options

A 403(b) is a tax-advantaged retirement plan available to eligible public school employees, workers at certain tax-exempt organizations and some ministers. The name comes from the section of the tax code that governs it. The IRS guidance describes arrangements funded through annuity contracts or custodial accounts that invest in mutual funds, as well as a separate type of retirement income account for church employees.

Congress changed the tax code in the 2022 SECURE 2.0 Act to permit collective investment trusts in 403(b) custodial accounts, PLANADVISER reported. The change did not also revise the securities laws governing the availability of the funds, so most 403(b) plans still could not use them. The House bill seeks to close that gap by changing the Investment Company Act, the Securities Act and the Securities Exchange Act. Plans such as 401(k)s already have access to these investment structures.

How a pooled trust works

A collective investment trust pools money from eligible plans and invests it under a bank’s administration. The banking regulator describes collective investment funds as trusts that hold assets together subject to banking rules. Workers generally obtain exposure through their employer’s plan menu rather than buying shares of a trust directly in a retail account. Some trusts are used for target-date strategies similar to those offered through mutual funds.

Supporters say trusts can charge less than mutual funds, in part because they serve institutional customers and do not use the same registration and distribution structure. Industry reporting from 401(k) Specialist noted that lower fees were central to the case for the bill. That is a potential benefit, rather than a guarantee of savings. The actual cost would depend on the investments and terms a plan negotiates, as well as other fees charged to the plan or its participants.

The bill also covers certain insurance company separate accounts, a different structure from a bank-managed trust. The proposed language would allow eligible plan contributions to enter such accounts under the specified securities-law exclusions. Both changes expand the types of investment arrangements a plan can use. Neither creates a new category of employee who can participate in a 403(b).

Who would approve the investments?

The bill text sets conditions for the new options. It covers plans already subject to the main fiduciary provisions of the Employee Retirement Income Security Act, plans whose employers agree to act as fiduciaries when choosing the investment menu, and governmental plans. In a governmental plan, the employer, a plan fiduciary or someone acting on the employer’s behalf would have to review and approve each investment alternative before participants could choose it.

Some lawmakers argued those conditions were insufficient. Reps. Stephen Lynch and Maxine Waters raised questions about investor protections and disclosure, especially for plans outside the federal law’s fiduciary framework. The dispute concerns how workers and plan sponsors would get information about a fund’s costs and how to compare that information with disclosures already available for other investments. Industry coverage reported that Lynch sought to preserve federal securities protections for plans not organized under that law, while Waters sought additional disclosures about funds and fees. Supporters argued that the bill would expand options and leave employers free to choose whether to use them.

What would change for workers

The change would take place at the level of the employer’s investment menu. Even if the bill became law, a teacher or nonprofit employee would see a new option only if the plan chose to offer one. Plan sponsors would still have to compare the terms of funds that might use similar strategies but have different expenses or reporting practices. A broader list of eligible investments does not by itself mean a worker’s balance would rise or that a particular plan would become cheaper.

The Senate has a companion proposal, and supporters have called for it to act. Senate timing remains uncertain, the trade publication reported. Both chambers would have to agree to the same legislation before it could reach the president. If that happens, the measure’s practical effect will depend on which employers add the funds, what terms they obtain and how clearly they explain the options to workers.