All Americans Deserve Access to the Best Retirement Investment Options – Inside Sources

An unforeseen effect of the affordability issue is that many Americans are slowing their retirement savings. Washington has cut taxes to ease expenses, but policymakers can do more. Millions of American workers use investment vehicles like 401(k) and 403(b) accounts, but despite their popularity, they do not offer the same choices, savings or outcomes. This hampers workers’ retirement preparation, but Congress can fix this inequity.

A 403(b) is a retirement account for employees of nonprofit organizations, comparable to a 401(k) used by for-profit employees. Public schoolteachers, state college professors, church employees, healthcare professionals at nonprofit hospitals, and charity workers all use 403(b)s. Ten million Americans have a 403(b) account.

Created in 1958, 403(b) retirement plans first supported certain nonprofit organizations and were extended to public education employees in 1961, who typically lacked access to retirement plan benefits. Participants initially could invest only in annuities, but as more sophisticated products were developed, so did the contents of the plans, and in 1974, 403(b)s were amended to include mutual funds. Today, however, they lack access to certain modern investment vehicles.

Other retirement plans, including 401(k)s, governmental 457(b), and Thrift Savings Plans, allow sophisticated investment options, specifically collective investment trusts (CITs). Only 403(b) investors are prohibited from investing in CITs.

Collective investment trusts are a popular investment method in other retirement plans. CITs are managed by a bank, which pools money from different investor accounts to purchase a diversified group of assets. They comprise almost 40 percent of 401(k) assets. Across all target-date funds, CITs have been continuously growing in popularity, holding a majority 54 percent of target-date assets (portfolios that change composition over time from aggressive to more cautious growth) by the end of 2025. A teacher using a 403(b) should not be shut out from this very popular investment product.

CITs are popular because they reduce costs, allowing investors to save more money. Although CITs offer similarinvestment strategies and generate similar gross market performance as mutual funds, their lower costs help investors keep a higher share of returns. The difference between 401(k) fees and 403(b) fees makes this distinction clear. Plans like 401(k)s, which include CITs as investments, average fees of 0.33 percent, while 403(b)s, which do not include CITs, average fees of 0.41 percent. Over a 40-year career, this difference can compound to between $23,000 to $28,000.

CITs are cheaper for several reasons: they cost less to administer, allow employers to negotiate lower prices and can be customized because they are not retail products. The cheaper costs associated with CITs make them a popular and potentially preferable option for investors — an option that all retirement investors should have access to.

By preventing 403(b) participants from investing in CITs, public schoolteachers, charity workers and other nonprofit employees are penalized for their occupations — often chosen out of a desire to help others. The Retirement Fairness for Charities and Educational Institutions Act, now included in the Incentivizing New Ventures and Economic Strength Through Capital Formation of 2025 (INVEST Act), can set all retirement investors on an equal footing. With it, nonprofit employees will finally be allowed to invest in CITs.

In the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022, Congress paved the way for easier adoption of 403(b) reforms. The SECURE 2.0 Act changed the federal tax code to make expansion of CITs possible, beginning by allowing 403(b)s with custodial accounts to invest in CITs in a group trust.

Although this is a promising step, this provision cannot be implemented until securities law is changed to permit it. If the measures in the INVEST Act pass, 403(b) investors will have access to CITs like their for-profit counterparts.

Should a teacher be less equipped to save for retirement because government regulations haven’t kept pace with innovation in investment products? For America’s 10 million teachers, church workers and nonprofit employees, reforms to 403(b) retirement accounts would finally give them parity with their 401(k) brethren.