Blog Misc The Difference Between 401(k) and 403(b) Retirement Plans

The Difference Between 401(k) and 403(b) Retirement Plans

date October 11, 2021 time 5 min read 533 views

401(k) and 403(b) plans are the two most qualified tax-advantaged retirement plans for employees. They are similar in many ways but do you know the differences between 401(k) and 403(b)? Let’s dive in.

A key difference between 401(k) and 403(b) is the type of employer offering them.
A key difference between 401(k) and 403(b) is the type of employer offering them. (Source: Pixabay)

There are many powerful retirement savings vehicles for employees including 401(k) and 403(b). Both are great non-profit retirement plans, but many people still do not know how to pick between the two. And you might be confused about your enneagram core motivations can affect your financial decisions. Don’t worry. Let’s take a look at the differences between 401(k) and 403(b) so that you can choose between them.

1. The type of employer:

The primary difference between 401(k) and 403(b) is the type of employer sponsoring the plans.

A 401(k) retirement plan is offered by for-profit businesses to help employees save for retirement. The size of the company and the state in which you live determine whether or not your employer offers a 401(k). Plan contributions are deducted from your paycheck pre-tax or after-tax, depending on whether you choose a standard or Roth 401(k).

Although the nature of 403(b) and 401(k) plans are nearly identical, 403(b) plans are only offered to employees of tax-exempt organizations. If you work for a hospital, school, university, church, or nonprofit organization, you are likely to have access to a 403(b) plan. 

2. Employer match

Employer match is a key difference between 401(k) and 403(b). Though both plans provide for an employer match, fewer employers contribute to their employees’ 403(b) plans. That is because if a company gives a 403(b) match, they must follow the regulations created by the Employee Retirement Income Security Act (ERISA), which governs employer-sponsored, tax-deferred retirement plans such as 401ks and 403(b)s. Hence, many employers want to avoid these regulations to save time and money.

Employers will match what you contribute up to a certain percentage of your salary.
Employers will match what you contribute up to a certain percentage of your salary. (Source: Pixabay)

Additionally, for non-ERISA 403(b) plans, expense ratios can be much lower because they have less stringent reporting requirements.

While a 403(b) plan has no solo option, small business owners with only one employee can set up their own 401(k) plan. These are available from brokers offering retirement plans. 

3. Investment Options and Cost

When it comes to the differences between 401(k) and 403(b) plans, investment options and cost are two main features we need to know. 401(k)s offer many different types of investment options such as mutual funds, annuities, stocks and bonds. 401(k) plans often offer a wider range and sometimes better quality of investment options as they are more expensive for the company. 

Only mutual funds and annuities are available in 403(b) plans. A 403(b) plan is also known as a tax-sheltered annuity plan, and the features of a 403(b) plan are similar to those of a 401(k). Technically, 403(b)s have fewer investment alternatives than 401(k)s, but if mutual funds are available, a 403(b) can be as flexible as a 401(k).

401(k) programs may offer more diversity through lower-cost index funds and ETFs, whereas 403(b) plans are more likely to offer expensive mutual funds and annuities as investment possibilities.

401(k) plans tend to be administered by mutual fund companies, whereas insurance companies are more likely to administer 403(b) plans. This is one reason why many 403(b) plans have a limited number of investment alternatives and prominently feature annuities, whereas 401(k) plans typically include a large number of mutual funds.

401(k) plans often offer a wider range of investment options.
401(k) plans often offer a wider range of investment options. (Source: Pixabay)

Besides, the fees and costs you pay may be minimal or substantial, depending on the investment options offered in your 401(k) or 403(b) plan. In some cases, as non-profit organizations and other qualified entities may be smaller than private, for-profit businesses, some 403(b) plans may have higher fees and administrative expenditures. 

401(k)s also limit your investment options. The average 401(k) plan in 2016 offered only 27 options, which is different from an IRA offering a wide range of traditional investment options. Fees eat into your budget as well. In other ways, depending on the quality of the plan, you may be confused with less-than-ideal options from a fee perspective.

4. Contribution limits

A noticeable difference between 401(k) and 403(b) is contribution limits. The government sets contribution limits on how much you can save in your 401(k) each year because of the tax benefits. For 2021, you can contribute a maximum of $19,500. If you are 50 or older, you can earn an extra $6,500 every year in catchup contributions. 

The plan limit does not include employer contributions. The total annual contribution limit including your and your employer’s contributions is less than your annual salary or $58,000. If you qualify for catch-up contributions, the limit is $64,500.

Tax benefits result in the difference between 401(k) and 403(b), (Source: pixabay)

Contribution limits for 403(b) plans are the same as for 401(k) plans, but 403(b)s have an edge. You can take a look at 401k 2022 contribution limit IRS. Additional contributions may be available to employees who have worked for a qualified organization for 15 years or more. Over the federal level, qualified employees can contribute up to $3,000 each year for up to five years.

Is one better than the other?

401(k) is not better or worse than a 403(b) since each account has both pros and cons. You do not likely have any choices between the two plans as your employer will probably offer only one, except for a few rare cases. All you need to do is to make sure you put enough money into them to take advantage of your employer’s match. 

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George Schooling

George Schooling

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