401k Vs. 403B Comparisons
Two retirement plans that some employers offer to their workers are 401k plans and 403b plans. Both of these plans are tax-deferred accounts, which means that the money is put into the account with pretax dollars and is reported as taxable income when you withdraw it at retirement. Both types of plans have the same annual contribution limits. However, these plans have significant differences when it comes to who can offer them, how much the employer participates in the plan and how the money is invested.
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Eligibility
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For-profit corporations offer 401k plans, while 403b plans can only be offered by certain nonprofits, including schools, hospitals and other qualifying 501c organizations. You can participate in either of these plans only if your employer offers the plan. Some employers, particularly smaller companies, may not offer these plans even if they are allowed to because of the expenses associated with maintaining them.
Matching Contributions
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Both 401k plans and 403b plans allow for matching contributions from employers. However, according to the Motley Fool, most employers who offer 403b plans do not make matching contributions on behalf of their employers. If you have the option to contribute to either a 401k or a 403b, check to see if either plan offers matching contributions from the company. If one does, you are essentially giving away free money by not contributing.
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Vesting
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Vesting refers to how much of the employer contributions an employee is allowed to keep if he leaves the employer. For example, if a company has made $5,000 of contributions to the account on behalf of the employer but the employee is only 80 percent vested, the employee would only keep $4,000 of the company's contributions. With a 401k plan, employers can required that an individual work for several years before becoming fully vested. With a 403b plan, everyone is immediately vested so any contribution made by the company is kept by the employee.
Investment Options
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The tax code allows a wider range of investment options for 401k plans than for 403b plans. 403b plans are limited to investing in annuity contracts and mutual funds. With a 401k plan, you can invest in any of the account options provided by the company. Larger companies tend to offer more investment options because they can afford the larger expenses.
Management
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Companies are required to manage their 401k plans themselves. With a 403b plan, the accounts are managed by outside financial institutions, traditionally insurance companies that sell annuities. The problem with annuity companies, according to Morningstar, is that they tend to cost more in fees than mutual funds. Therefore, you should carefully check the fees because if they are too high, you may be better off investing in a 401k plan, if possible, or even in a taxable account.
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References
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