Broader Investment Options on the Horizon for Section 403(b) Retirement Plans

Legislation recently approved by the House Financial Services Committee (H.R. 1013, the Retirement Fairness for Charities and Educational Institutions Act of 2025) would dramatically expand investment options available to participants in retirement plans maintained by many universities and hospitals.

Section 403(b) and Section 401(k) Plans

Section 403(b) plans are a type of defined contribution plan that may be maintained for the employees of Section 501(c)(3) tax-exempt entities, public universities and school systems, employers of ministers, and certain health and hospital service organizations. They see widespread use by public and private universities and by hospitals, and, as of 2024, collectively held approximately $1.3 trillion in assets. Like Section 401(k) plans, they typically provide for participant-directed investment, among options offered under the plan.

Not all Section 403(b) plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA). Plans maintained by government entities are not subject to ERISA, and under the US Department of Labor regulations, those that accept only employee salary deferrals, and involve no employer involvement, other than certain minimal activity, are exempt from ERISA. In addition, there has been a significant difference in the manner in which the assets of Section 403(b) plans and Section 401(k) plans may be invested.

Available Investment Options

Historically, subject to an exception for certain church plans, Section 403(b) plans have been limited to two investment vehicles: annuity contracts (which may be fixed or variable) and custodial accounts, with investment options under the latter limited to SEC-registered mutual funds. Investment options structured as collective investment trusts (CITs) have not been permitted under a Section 403(b) custodial account, but can be offered under Section 401(k) plans.

The disparity in permitted investment options has put Section 403(b) plan participants at something of a disadvantage compared to 401(k) plan participants. As discussed in our Legal Update, Lifetime Income Products in CITs on the Rise, investment options offered under Section 401(k) plans are increasingly structured as CITs rather than mutual funds, largely due to differences in cost. For structural and regulatory reasons, CITs do not have boards of directors and are not subject to SEC filing requirements, and their target market consists of institutions rather than individual investors, resulting in lower marketing costs.

Legislative Changes

The restrictions on Section 403(b) plan investments were, until recently, a function of both the Internal Revenue Code and the securities laws, and there have been various bills introduced in Congress over the years to modify these restrictions. In 2022, the SECURE 2.0 Act amended the Internal Revenue Code to permit Section 403(b) plans to invest in CITs, as well as in mutual funds, but, somewhat frustratingly, did not remove the securities-law impediments to such investments.

However, in February 2025, the Retirement Fairness for Charities and Educational Institutions Act of 2025 was introduced in both the House (H.R. 1013) and Senate (S. 424). The legislation would amend the securities laws to allow many Section 403(b) custodial account plans to invest in CITs, as well as certain unregistered insurance contracts that may be offered to 401(k) plans.

On May 20, the House Financial Services Committee approved by bipartisan a vote of 43-8 H.R. 1013, which as amended, would allow certain Section 403(b) plans to include CITs among the investment options offered to their participants: (i) 403(b) plans subject to Title I of ERISA; (ii) governmental plans; and (iii) plans sponsored by employers acting as fiduciaries, provided that—in the case of a government plan—either the employer, its representative, or a fiduciary of the plan reviews and approves each investment alternative under the plan, prior to the investment being offered to participants in the plan.

Enactment of H.R. 1013 would result in expanded investment options for Section 403(b) plan participants. Please watch this space for further developments.