Iterate inside a CDT

You need to do this the other way around. Iterate over the local!b list:

a!localVariables(
local!a: { 1 },
local!b: { 3, 4, 5 },
a!forEach(
items: local!b,
expression: 'type!{urn:com:appian:types:XZY}Employee'(
ID: local!a,
Value: local!a,
Field: fv!item
)
)
)

That should result in a list of type 'Employee' with the fields set as required.

Both are arrays, think local!a as {1,2,3,4}, not just 1 value. I've enhanced the question with this particular mention

Ok, understood.

So, you'll need to nest your a!forEach() loops. The outer one will select a value from local!a. You need to hold that value as a local!variable to be used in the inner loop:

a!localVariables(
  local!a: { 1,2 },
  local!b: { 3, 4, 5 },
  a!forEach(
    items: local!a,
      expression:  with(
        local!temp: fv!item,
        a!forEach(
        items: local!b,
        expression: 'type!{urn:com:appian:types:XZY}Employee'(
          ID: local!temp,
          value: local!temp,
          field: fv!item
        )
      )
    )
  )
)