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CRS Report Highlights Regulatory Obstacles for Pension Plans

The report identified the key investment issues faced by federal and private-sector pension plans

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  • Written by  Buyside Exchange staff
 
 
CRS Report Highlights Regulatory Obstacles for Pension Plans

The Congressional Research Services (CRS) identified several regulatory issues faced by pension plans looking to expand to new investment vehicles.

The report, Pensions and Individual Retirement Accounts (IRAs): Investment Issues, identified the regulatory obstacles faced by 403(b) plans looking to invest in group trusts and the Department of Labor’s (DOL’s) concerns over 401(k) plans investing in cryptocurrency.

The report covered state and local pensions, federal pensions, private sector pension plans and individual retirement accounts (IRAs) and analyzed the relevant federal authorities, relevant federal oversight and any administrative issues.

It also identified key pension investment issues for Congress, highlighting specific policy issues related to pension investments.

403(b) plans and CITs

Congress's move to standardize some of the investment restrictions affecting pension plans has brought attention to Collective Investment Trusts (CITs).

It identified the impact of the SECURE 2.0 Act 2022, designed to encourage Americans to save for retirement.

The act included changes to 401(k) and 403(b) plans to allow the different types of retirement plans access to similar investment vehicles. Before the act was introduced, 403(b) plans were only allowed to invest in annuity contracts provided by insurance companies and/or custodial accounts which invested only in SEC-registered mutual funds. By comparison, 401(k)s can invest in a much wider variety of investment vehicles, including CITs, which are pooled investment funds held by banks or trust companies that are available only to certain qualified retirement plans.

CITs are maintained by banks and therefore regulated by the Office of the Comptroller of the Currency (OCC) rather than the SEC.

The act amended the Internal Revenue Code (IRC) to permit 403(b) custodial accounts to invest in group trusts, such as CITs, with other tax-preferred savings plans and IRAs.

However, the report highlighted that the act only impacted the IRC, not securities laws such as the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, which would be required to permit 403(b) plans to participate in CITs.

Cryptocurrency

As a new investment option, very few pension plans are investing in cryptocurrency overall. The report identified FORUSALL as the first financial services company to offer plan sponsors the option to adopt cryptocurrency as an investment for participants in 2021.

Similarly, while defined benefit (DB) plan sponsors may invest in cryptocurrencies, the report noted “current use appears to be minimal”.

In 2022, the DOL released a Compliance Assistance Release,  “401(k) Plan Investments in ‘Cryptocurrencies,’”  in which the department expressed “serious concerns” about plan fiduciaries’ decisions to allow DC plan participants to invest in cryptocurrencies.

The release noted that under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.

It said: “At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.

“These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft and loss.”

The release also stated that the DOL would conduct an investigative program focused on plans that offer cryptocurrency investments and that plan fiduciaries could expect to be questioned by DOL about their decisions.

Despite a high volume of Congressional activity around the pensions industry, further clarity around the regulations is needed to ensure plan fiduciaries can make the best decisions for their beneficiaries.

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