Diversified Stable Value blocked in 403(b)

/ ChrisTobe

Diversified synthetic-based stable value with its lower risks and lower fees has been effectively blocked from 403(b)s for decades by the insurance lobby, ie, TIAA, Prudential, Lincoln, AIG, Voya, and more.   As more general account annuities come under ERISA scrutiny https://commonsense401kproject.com/2025/10/10/parties-in-interest-prohibited-transactions-disgorgement-tiaa-case-study/  for their lack of diversification, synthetic stable value is positioned to hopefully crack the 403b market.

1. Historical Barrier: 403(b) and Securities Law Interpretation

  • For decades, practitioners (and insurers, Wrap Providors) argued that synthetic stable value structures could not be offered inside 403(b) plans because of the way the Investment Company Act of 1940 was interpreted.
  • The technical issue: 403(b) accounts are either 403(b)(1) annuities or 403(b)(7) custodial accounts (mutual funds). The “synthetic wrap” model relies on bank/insurance wrap contracts + bond portfolios, often structured under §3(c)(7) (qualified purchaser exemption). Regulators were concerned that if each participant was treated as an investor, they’d need to be a “qualified purchaser” — which most teachers, nurses, and nonprofit employees are not.
  • Insurers were not incentivized to push for a solution, since general account fixed annuities were far more profitable than synthetic structures (they capture the spread). That aligns with your suspicion: insurers had no reason to advocate for allowing synthetics in 403(b).

2. The Invesco 2014 No-Action Letter — A Breakthrough

The Invesco Advisers letter (April 8, 2014) changed the picture:

  • SEC Staff Position: A 403(b) plan itself (sponsored by a university or hospital) can be treated as the qualified purchaser, not each individual participant.
  • Key Condition: The 403(b) sponsor must be subject to the ERISA “Prudent Man” fiduciary standard (or contractually agree to it). That makes the sponsor the decision-maker, rather than the participant.
  • Result: This removed the core legal barrier. The SEC staff said they would not recommend enforcement action if the 403(b) plan sponsor invested in §3(c)(7) Separate Accounts (synthetic stable value building blocks) through a generic stable value option managed by Invesco

403bNo-Action Letter_ Invesco A…

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  • Precedent Cited: The SEC analogized to the H.E.B. (H.E. Butt Grocery 401(k)) no-action letter (2001), where 401(k) plans invested in §3(c)(7) funds without each participant being a qualified purchaser.

This effectively refuted the “not allowed in 403(b)” argument, but in practice, many large insurers kept marketing their general account fixed annuities because that’s where the hidden spread profits lay.

3. Current Push: Allowing CITs in 403(b) Plans

  • Recent legislation/regulation (still evolving) is designed to open 403(b) menus to Collective Investment Trusts (CITs), which are bank-maintained vehicles commonly used in 401(k).
  • Many of the best stable value options in the market — Vanguard Retirement Savings Trust (RST), Fidelity Managed Income Portfolio (MIP), and funds in the Hueler Universe — are structured as CITs.
  • These CIT stable value funds are largely synthetic-wrap based (bond portfolios plus insurance/bank contracts).
  • If the new law passes, there’s no structural reason they could not be offered in 403(b) — in fact, the Invesco 2014 letter provides an SEC blessing that synthetics can already fit into 403(b) if the fiduciary standard is met. The CIT legislation would simply provide the vehicle.

4. Likely Resistance from Insurers

  • Expect TIAA, AIG/VALIC, Prudential, Lincoln and other annuity providers to lobby against CIT adoption in 403(b). Why?
    • Their general account fixed annuities yield them 100–200+ bps in spread profits.
    • Synthetic CIT stable value products typically pass through as much or more yield to participants, with much lower hidden spreads and 1/10th the single entity credit risk.
    • Opening the 403(b) market to Vanguard/Fidelity synthetic CITs would directly threaten insurers’ dominant (and highly profitable) position.
  • Historically, TIAA in particular has used its academic lobbying power (Wharton, etc.) to promote annuity dominance in 403(b). The same playbook would likely be used here.

5. Conclusion — Would Synthetic Stable Value CITs Be Allowed?

  • Yes, legally: The Invesco no-action letter shows that synthetic stable value strategies can fit inside 403(b) if structured properly. The new legislation enabling CITs in 403(b) would explicitly open the door for Vanguard RST, Fidelity MIP, and other Hueler-tracked synthetics.
  • But practically: Insurers (TIAA, Lincoln, Prudential VALIC, etc.) have every incentive to resist or stall implementation, since it undermines their spread-based monopoly. Expect both lobbying and potential technical challenges (e.g., custodial account mechanics, fiduciary oversight arguments) to delay adoption.

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