401(k) vs 403(b): Differences In Investments, Compliance, and Administration

September 13, 2016 by Esther Kim

Whether you’re benchmarking your nonprofit’s current retirement benefit or growing out of your current solution, ForUsAll has compared the main differences between 403(b) and 401(k) plans.

In the past, 403(b) plans were easier to administer for many nonprofits – so your nonprofit’s first retirement plan was probably a 403(b). While the 403(b) came with less administrative hassle, their more limited investment options often led to higher fees than many 401(k) plans.

Today, many 403(b) plans have to follow similar ERISA compliance requirements, without the typical 401(k) benefits. It may make sense to see if switching to a 401(k) is the right move.

Benchmarking 403(b) vs. 401(k)

Carefully consider your options, looking at: how much compliance responsibility you’ll take on, whether it fits your employees’ needs, and if the plan is flexible enough to scale as you grow. Also important is investment selection: Most 403(b) plans only allow annuities and mutual funds, with the exception of some churches. Brokerage windows are not available to employees through a 403(b) plan.

Here’s how 401(k) and 403(b) plans compare:

EMPLOYEE ELIGIBILITY

401(k) plans allow employers to customize who’s eligible for the plan. Most 403(b) plans must make all employees immediately eligible for the plan.

401(k) vs. 403(b)

Tailor eligibility to meet the realities of the organization (high turnover, large number of part-time workers, etc.), often avoiding costly large-company audits required by the DOL.

Generally, nonprofits need to make all employees immediately eligible for the 403(b), even part-time workers or workers that aren’t expected to stay at the organization all that long.

 

If you’re a nonprofit that has a large workforce and high turnover, then you can very quickly be subject to a large plan audit, which is generally required when a plan has more than 100 eligible employees. The large plan audit applies to plans with over 100 participants and can be very expensive (likely between $15k-$20k).

By setting up a 401(k) with a smarter eligibility period, many nonprofits are able to delay or avoid altogether reaching the 100 eligible employee threshold that can trigger the expensive audit. Employee eligibility periods allow organizations to be strategic with the benefit by only making it available to employees that are committed to staying with the organization — reducing administrative costs and helping you retain your best talent.

COMPLIANCE

ERISA 403(b) plans and ERISA 401(k) plans are subject to essentially the same ERISA requirements.

401(k) vs. 403(b)

Annual Form 5500 filing

Annual Form 5550 filing

Large plan audit for organizations with over 100 employees

Large plan audit for organizations with over 100 employees

Subject to three out of three IRS non-discrimination tests

May only be subject to two out of three IRS non-discrimination tests (not subject to the Top Heavy test)

 

In rare cases, a 403(b) plan can qualify to be a non-ERISA plan, which reduces compliance work significantly. However, many common elements found in retirement plans — including offering a company match — immediately disqualify a nonprofit from offering a non-ERISA plan.

CONTRIBUTION LIMITS

Both 401(k) and 403(b) plans enjoy the same annual contribution limits.

401(k) vs. 403(b)

Employee contribution limit in 2016: $18,000

Employee contribution limit in 2016: $18,000 – $21,000 (depending on the type of nonprofit, employee contribution history and service with the employer)

Age 50+ catch-up contribution limit: $6,000

Age 50+ catch-up contribution limit: $6,000

 

INVESTMENT SELECTION

401(k) plans allow more investment options than 403(b) plans.

401(k) vs. 403(b)

Mutual funds, individual securities, exchange-traded funds, annuities

Assets in a 403(b) plan can be placed in any of the following investment types:

  • an annuity contract provided through an insurance company;
  • a custodial account invested in mutual funds;
  • or a retirement income account set up for church employees.

Brokerage windows are allowed

No brokerage windows are allowed

 

The wider range of investment options can help organizations find lower-fee funds that meet the needs of their employees. This is important, as excessive fees can dramatically reduce your employees’ retirement savings.

Giving your employees a broader set of lower cost investment options is a compelling reason to consider switching your group away from a 403(b) plan. If nothing else, it is likely worth your time to benchmark your plan’s investment options against what is possible with a modern 401(k) plan.

Looking to make a 403(b) change?

If you’re looking to offer an employer match at some point, give employees a broader set of investment options, and customize employee eligibility then the 401(k) plan might be the right option for you. The information contained in this post is not intended to be or relied on as legal advice.  You should consult an ERISA attorney or other professional plan consultant before making a change. Get a full shopping checklist to evaluate any retirement plan provider here, and give us a call if you’d like to discuss your non-profit’s retirement plan options.

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Esther Kim

Esther Kim

Esther brings a wealth of industry and marketing experience to ForUsAll. She’s spent four and a half years as a marketing leader in fintech companies, with a focus on 401(k) solutions. Esther got her start at Qualcomm, honing her corporate communications chops serving the executive team within Government Affairs. She's rolled up her sleeves to build marketing and customer success teams at Lever and SigFig. Esther joined ForUsAll after serving with the founding team at Financial Engines. Esther earned her BA in Psychology from the University of California, San Diego. In her free time, Esther is learning French, loves to be outdoors, and is an avid Korean dumpling maker.
Esther Kim

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