What Is the Difference Between a 401(k) and a 403b Retirement Plan?

Author: Siân Killingsworth / 6 Jun 2020 / 401(k) Resources

401(k) plans are for private, for-profit businesses. 403b plans are for tax-exempt organizations and non-profits.

The 401k and 403b are both tax-advantaged retirement savings plans. Both accept payroll deductions and help employees grow their retirement nest eggs through investment options like stocks, mutual funds, ETFs, and other vehicles. Both allow for employer match or profit-sharing contributions at the employer’s discretion, up to 25% of eligible payroll.

Loans can be taken out from both plans if necessary, offering a low-cost lifeline for buying your first home, paying college tuition, or staying afloat during emergency situations.

Differences between 401(k) and 403b

The plans differ in terms of:

Plan Sponsors

ANY employer, big or small, can sponsor a 401(k) if they choose to do so.

On the other hand, only non-profit companies, religious organizations, school districts, and governmental organizations may have a 403b plan.

Employee Eligibility

To be eligible for a 401(k), participants must be at least 21, with at least one year of service and 1,000 hours or more of service per year. Union employees entered into collective bargaining agreements and non-resident aliens are generally ineligible. Individual employers can mandate when employees become “vested” in the plan.

To be eligible for a 403b, there are no age or annual requirements, but employees must work more than 20 hours per work. Professors on sabbatical, union employees, and non-resident aliens are generally excluded. Only certain types of industries may have a 403b.

Deductions

The 401(k)’s employer contributions are deductible for employers, whereas 403b employer contributions are tax-deferred for employees. Both accounts are pre-tax and tax-deferred for employees.

Contribution Limits

The deferral limit for both 403b and 401(k) is $20,500, with an additional $6,500 in catchup contributions allowed for those over 50.

However, the 403b plan allows workers with at least 15 years of service to add another $3,000 to their limit each year, to a maximum of $15,000.

Investment Options

A 401(k) account allows for a vast range of investments, including index funds, bond funds, large-cap and small-cap funds, real estate funds, foreign funds, and more – though they may be limited by the employer or broker selected.

By comparison, the 403b options are limited. In the past, employees could only invest in an annuity — a financial product offered through insurance companies that provides fixed payments to the annuity holder. Only recently have mutual funds become available, but not all employers offer them.

Administration

In the past, 403b plans were exempt from certain administrative processes that applied to 401(k) plans, thus lowering the overhead administrative costs. However, the limited investment options often led to higher fees than many 401(k) plans. Today may 403b plans are required to follow similar ERISA compliance requirements, so there is not much difference in administration.

Cost

Overall plan costs are determined by the types of investments selected, the level of service, and the plan provider/broker selected. Certain types of assets, like a variable annuity, may have higher fees that cut into your earnings. It’s worth exploring alternatives if you are looking to cut costs.

Which one is better?

Both options are great ways to save for retirement. However, if you find the investment choices are too limited and the costs too high for a 403b, switching to a 401(k) is always an option.

Since 1999, Ubiquity has offered flat-rate small business 401(k) plans with full transparency and no AUM fees or hidden costs. You may work with the broker of your choice to select investment options, while we administer the plan and provide full employer/employee support. Contact us to learn more.