Why 403(b) Plans Pay More: The Push for Lower Fees

A significant disparity in retirement savings costs plagues over 10 million Americans holding 403(b) plans, who frequently incur higher investment fees compared to their 401(k) counterparts. This imbalance, which silently erodes wealth over decades, has prompted a formidable coalition of industry leaders to champion new legislation. Their objective is clear: to open 403(b) plans to more cost-efficient investment vehicles.

The Persistent Fee Disparity Driving Reform

The core issue revolves around a measurable difference in investment expenses. For years, participants in 403(b) plans, predominantly educators, healthcare professionals, and non-profit employees, have been locked into investment options that are demonstrably more expensive. Why should a worker’s retirement savings be subject to a higher fee structure simply because of their employer type?

A detailed Vanguard analysis highlights this predicament, revealing that Collective Investment Trusts (CITs) typically carry fees approximately 0.08 to 0.09 percentage points lower than comparable mutual funds. While this percentage difference may seem minor, its long-term impact is profound. For a worker earning the median salary of $74,000, this seemingly small 0.08% fee difference can translate into a staggering $23,000 to $28,000 in forgone savings by the time they reach age 65. Such a substantial sum underscores the urgent need for a legislative remedy.

A coalition of 30 industry executives, representing asset managers, life insurers, and benefits groups, recently articulated this concern in a letter to Senate Banking Committee chairman Tim Scott and ranking member Elizabeth Warren. This collective voice, including CEOs from giants like TIAA, Principal Financial Group, Prudential Financial, and Vanguard, is a powerful endorsement of the proposed changes. They are advocating for the advancement of the Retirement Fairness for Charities and Educational Institutions Act (S.424/H.R.1310), a bill designed to bridge this long-standing gap in investment access.

The financial discrepancy faced by millions in 403(b) plans is not merely an administrative oversight; it is a systemic disadvantage that compounds over a lifetime, demanding immediate legislative correction.

The Mechanics of Cost Savings with CITs

Understanding why Collective Investment Trusts (CITs) offer a more cost-effective solution is crucial to appreciating the current legislative push. The fundamental advantage of CITs lies in their regulatory framework. Unlike retail mutual funds, CITs are not required to register under federal securities laws. This exemption significantly reduces the overhead associated with marketing, distribution, and extensive compliance—costs that are invariably passed on to investors in traditional mutual funds.

The empirical evidence supporting CITs’ cost efficiency is compelling. A study conducted by Morningstar found that CITs are cheaper than equivalent mutual fund share classes an impressive 91% of the time. This inherent structural efficiency makes them an ideal vehicle for large-scale institutional investment, where cost management directly impacts long-term returns. Furthermore, CITs have already proven their value in other retirement plan structures.

In 401(k) plans, for instance, CITs now account for a substantial 37% of total assets. Their growth trajectory has been remarkable, particularly within target-date funds—a popular choice for set-it-and-forget-it retirement savers. sed mutual funds in target-date assets in 2024 and expanded their dominance to hold 54% of that category by year-end 2025. This success story within 401(k)s demonstrates their reliability and potential for 403(b) plans, offering a proven pathway to reducing participant fees without compromising investment integrity.

Legislative Efforts and the SECURE 2.0 Gap

The path to rectifying this fee inequity has been slow, despite a clear recognition of the problem by policymakers. The SECURE 2.0 Act, a landmark piece of retirement legislation, did amend the tax code to address some aspects of this imbalance. However, it critically failed to make the corresponding changes to federal securities law. This omission left workers in the education, healthcare, and nonprofit sectors still unable to access the very investment vehicles that have fundamentally reshaped the 401(k) market.

This legislative oversight essentially created a two-tiered system, where access to lower-cost investment options became dependent on the type of employer, not the financial needs of the employee. It’s a frustrating example of incomplete reform, leaving millions disadvantaged. The House of Representatives did take a decisive step in December 2025, passing its version of the fix as Section 202 of the INVEST Act (H.R.3383) with a strong bipartisan vote of 302-123. This demonstrated broad recognition of the issue.

However, the Senate companion bill, included in the Empowering Main Street in America Act (S.5139), has yet to be scheduled for a vote by the Senate Banking Committee. This delay is costing ordinary workers thousands in lost savings, year after year. The question remains: when will the Senate act to close this unnecessary financial gap for such a vital segment of the American workforce? Ensuring that 403(b) plans can offer the same advantages as 401(k)s is not just about fairness; it’s about optimizing retirement security for a significant portion of the population.

New Avenues for Annuity Providers and Investor Safeguards

Beyond opening access to Collective Investment Trusts, the proposed legislation holds another significant provision, particularly for the annuity market and retirement income providers. The bill would permit 403(b) plans to hold non-registered insurance company separate accounts. This change represents a crucial development, as it would unlock a historically restricted channel for guaranteed lifetime income products, offering a new avenue for distribution and growth within the retirement sector.

The annuity market has seen robust expansion, with US annuity sales reaching an impressive $432.6 billion in 2024, marking a 12% increase from the prior year. This was a record year, with quarterly sales exceeding $100 billion in all four quarters for the first time. The ability for 403(b) plans to integrate these non-registered separate accounts could further accelerate this growth, providing more options for participants seeking income stability in retirement.

Crucially, the coalition’s letter emphasizes that this legislation is designed to preserve robust investor protections. These expanded investment options would be exclusively limited to employer-sponsored plans that are overseen by plan fiduciaries, or where employers themselves assume fiduciary responsibility. This ensures that a professional layer of oversight remains intact, safeguarding participant interests. Moreover, the bill does not alter the Securities and Exchange Commission’s enforcement authority, meaning regulatory scrutiny will continue to protect investors from potential abuses. This balance of expanded access and continued protection is vital for maintaining confidence in the retirement system.

What Should You Do About Your 403(b) Plan?

For individuals currently participating in 403(b) plans, understanding the implications of these proposed changes, or the lack thereof, is paramount. First, take the time to review your current plan’s investment options and associated fees. Are you aware of the expense ratios for your chosen funds? High fees, even seemingly small ones, can significantly erode your retirement nest egg over decades, creating a substantial drag on your long-term growth.

Consider engaging with your plan administrator or human resources department to inquire about the potential for lower-cost investment vehicles and the institution’s stance on the pending legislation. While you may not directly influence congressional action, collective employee interest can certainly highlight the importance of these reforms to plan sponsors. Familiarize yourself with the Retirement Fairness for Charities and Educational Institutions Act (S.424/H.R.1310) and its potential benefits.

Finally, advocate for your financial well-being. Contact your elected representatives to express your support for legislation that aims to equalize access to efficient, lower-cost investment options across all retirement plan types. Your voice, combined with that of millions of other workers, can accelerate the necessary legislative progress. In the interim, ensure you are making informed decisions within your current plan, always prioritizing cost-efficiency and diversification.

Navigating 403(b) Investment Changes – Disclaimer

This article offers general information about the legislative push to reduce 403(b) plan fees and does not constitute financial advice. Investment outcomes depend on individual circumstances, market conditions, and specific plan details. Readers should consult with a qualified financial advisor to discuss their personal retirement planning strategies, investment options, and the potential impact of any legislative changes on their portfolio.