401k or 403b – Get it Right from the Start – The Plan Sponsor University (TPSU) is into the fourth year of helping retirement plan fiduciaries to understand their roles and responsibilities. TPSU has accepted the challenge of educating both seasoned fiduciaries and those fiduciaries who are new to the position.
During a TPSU Program at Fordham University School of Law, Fred Barstein Founder and CEO of The Plan Sponsor University interviewed a program attendee who recently changed employers and finds himself overseeing a retirement plan that he was not familiar with – the 403b plan. The interviewed attendee had worked with 401k plans in the past but he is now faced with understanding the differences between the 403b and the 401k.
Who can offer a 403b?
The 403b feature of the Internal Revenue Service code permits non-profit companies, religious organizations, and school district to offer the 403b plan. The U.S. tax code exempts 403b plans from some of the administrative processes which do apply to 401k plans. The 403bPlans can have lower costs as the result of less administrative burden. This feature is beneficial to the non-profit organizations because it holds down expenses.
403b plan costs
As with any retirement plan the fiduciaries need to keep an eye on costs. There can be substantial differences in the amount of investment fees that are being paid when comparing a 401k plan and a 403b plan. Regardless of the plan type, fiduciaries must learn the total cost of the investment on its own, whether it is a managed account, a mutual fund or an annuity. Much of the cost differential is based upon the type of investment products being used. Another cost component is driven by the service levels that the plan participants receive.
Elective Deferral Limits
Both 401k and 403b plans have limits on how much an employee can contribute to them (i.e. maximum 401k contribution limits). The IRS rules for both the 401k and the 403b can be found at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits.
His firm is a not-for-profit and the firm utilizes a discretionary contribution for the employer contribution
Make wise choices in your 403b plan
In the case of the interviewee, the not-for-profit organization has a discretionary contribution for the employer contribution. Anyone who chooses to not participate in any retirement plan needs to know if they are leaving retirement dollars on-the -table before choosing to not participate.
