403(b)s and 401(k)s have similar structures but are applied in very different circumstances. 403(b)s can only be used by nonprofits, while 401(k)s can only be used by small businesses. Not-for-profits like churches, public schools, and government agencies use a 403(b) vs 401(k) plans, which are used by for-profit companies and the self-employed.
403(b) vs 401(k) at a Glance
|Investment Options||Mutual Funds, Annuities||Mutual Funds, ETFs, Stocks, Bonds|
|Total Contribution Limits||$55,000 (only partially tax-deductible)||$55,000 or 25% of income (profit-sharing from employers)|
|Mandatory Matching||0% - All contributions are employee-funded unless employer opts for non-elective contributions||0% - Employer can choose to match deferrals and/or make profit-sharing contributions|
|Plan Pricing||Administration Costs: 0.5%-2%|
Recordkeeping Fees: 0.15%-0.5%
Custodian Fees: $20-$50
Mutual Fund Expense Ratios: 0.15%-1%
|Plan Administration Fee: 0.25%-2%|
Custodian Fee: 0.25%
Advisor Fee: 0.5-1.5%
ETF and Mutual fund Expense Ratios: 0.25%-2%
Trading Commissions: $5-$10/trade
|Rules & Deadlines||Limited investment options,|
Contributions by year-end
|More diverse investment options; |
vesting schedules available for employer contributions; profit-sharing after year-end
|Ease of Use||Need an administrator; very restrictive||Better with an administrator; can also be restrictive|
|Customer Service||Provided by custodian/broker||Provided by custodian/broker or payroll provider, depending on issue|
|Top Providers||TIAA, Vanguard, Fidelity, T. Rowe Price||Wells Fargo, Vanguard, Fidelity, Human Interest|
403(b) Plans for Nonprofits
A 403(b) plan is structured much like a 401(k), but is used exclusively by nonprofits, churches, some public schools, and government agencies. If you run a nonprofit, a 403(b) is typically the only retirement option for you and your employees. This is largely because nonprofits aren’t helped by many 401(k) tax benefits, nor do they have profits to share within the plan.
401(k) Plans for Small Businesses
401(k)s are extremely popular retirement plans, with 19% of the $27.2 trillion of US retirement assets. They’re used by businesses ranging from self-employed to large companies with thousands of employees. For-profit companies cannot qualify for a 403(b) plan, and their only option is a 401(k) or a valid for-profit alternative.
Alternatives for Small Businesses
If you’re a for-profit business looking for an alternative, you might benefit from a different 401(k) structure or even an IRA. In fact, there are as many as six or more different types of retirement plans that might be right for your company. Check out our article on the Best Small Business Retirement Plans to learn more.
403(b) vs 401(k): Pricing & Benefits
In comparing 401(k)s vs 403(b)s, we considered their respective contributions, investment options, matching, pricing, ease of use, and customer service. After a quick review, it’s easy to see that only one option or the other will work in most cases, so pricing isn’t a determining factor. However, we’ve provided the pricing and benefits of each so you can see how they stack up.
403(b) Plan Pricing & Benefits
403(b)s are the obvious choice for nonprofits, public schools and hospitals, some government agencies, and churches. This is the case regardless of desired contribution level, matching structure, filing deadline, or cost. In most cases, a 403(b) is the only option available for non-profits.
403(b) Plan Pricing
403(b) plan pricing is structured similar to 401(k) plans. Expenses include plan administration (0.5%-2%), recordkeeping and custody (0.2%-0.75%), and investment costs (including fund expense ratios of 0.15% to 1%). 403(b) plans can be cost-effective for larger organizations with more employees, but per-participant costs can be expensive for smaller organizations.
Specific 403(b) plan costs include:
- Administration costs (0.5%-2%) – 403(b)s have plan administrations that charge fees based on the number of plan assets and/or participants. As plan participation or assets increase, fees tend to rise.
- Recordkeeping fees (0.15%-0.5%) – Recordkeeping is often included in plan administration but sometimes has a separate fee tied to employee headcount. This expense rises as the number of plan participants increases.
- Custodian fees ($20-$50) – These expenses are paid directly by employees and are usually a flat fee.
- Mutual fund expense ratios (0.15%-1%) – Since plan participants can only invest in mutual funds or annuities, they don’t have trading costs. However, annuities and mutual funds typically have their own expense ratios that are paid automatically from employee account balances based on the assets invested. As an employee invests more, the amount they pay in fund expenses rises.
- Investment advisory fee (0%-1.5%) – Since investment options are limited, not many 403(b)s have investment advisors. For those plans that do, there’s an advisory fee paid from each participant’s account based on the amount they invest. As account balances rise, the amount they pay in advisory fees increases.
A 403(b) includes the following benefits:
403(b) Plan Investment Options
403(b) investment options are incredibly restricted. Investment options are generally very conservative, and there is no option for trading stocks or bonds or investing in real estate. Known as a “deferred annuity plan,” a 403(b) allows participants to invest in certain conservative assets, including:
- Annuity contracts – 403(b) plans were started for participants to invest in tax-deferred annuities. These products are actually contracts with insurance companies that are structured to provide steady income during retirement.
- Some mutual funds – Since the advent of 403(b)s, the investment options have expanded to include some mutual funds, though more aggressive or sector-specific mutual funds are generally not offered in 403(b) plans.
- Target date funds – Some 403(b)s have also started allowing participants to invest in some target date funds, which are specifically structured to change the balance of stocks and bonds as a target retirement date approaches.
“Today, employers that offer 403(b) plans continue to view them as key vehicles for securing their employees’ welfare in retirement, and annuities remain a core investment option. In 2012, 84 percent of employer-sponsored 403(b) plans offered fixed annuities as an investment option.” – Patty Wu, Senior Managing Director, TIAA
403(b) Plan Contribution Limits
403(b) contribution limits for 2018 are determined by individual formulas based on years of service, but can’t exceed $55,000. Employee deferrals for 2018 are limited to $18,500 (unless you are further limited by IRS formulas). 403(b) plan participants can get an additional $18,500 in tax-deferred contributions through employer matching, if available.
The last $18,000 can potentially come from additional employer contributions that are discretionary and taxable to the employee. However, matching and additional employer contributions are optional and aren’t present in every plan, and individual employee limits can vary according to IRS guidelines.
403(b) Plan Mandatory Matching
While there is no limit on the matching in 403(b) plans, matching also isn’t mandatory. In fact, only some employers choose to match employee deferrals or provide additional non-elective contributions similar to the profit sharing component in a 401(k) plan.
If you’re interested in learning more about 403(b) plans, check out our article on 403(b)s, including their rules, contribution limits, and deadlines.
401(k) Plan Pricing & Benefits
Even though their benefits seem similar on paper, 401(k) plans are far more common than 403(b)s. This is partly because 401(k)s are common options for for-profit businesses that aren’t eligible for 403(b)s.
401(k) Plan Pricing
401(k) plan pricing is structured similar to 403(b) plans. 401(k) cost per-participant is usually higher for small businesses than larger companies. According to Human Interest, businesses with 10 employees will pay about $2,000 annually for administration. Participants will also have to pay costs including mutual fund expense ratios and commissions on stock trades.
Typical 401(k) costs include:
- Plan administration fee (0.25%-2% annually) – Most businesses with 401(k)s hire a third-party administrator to oversee the plan, conduct annual compliance testing, and file the annual Form 5500. Plan administration fees usually have a base rate, as well as an additional cost for each participant.
- Custodian fee (0.25% of plan assets) – Financial institutions that hold 401(k) accounts often charge a separate fee for holding plan assets. This fee can be fixed or based on plan assets, but shouldn’t exceed 0.25% of plan assets.
- Advisor fee (0.5%-1.5% of plan assets) – If you decide to hire an advisor to provide advice on specific investments, you’ll be charged additional fees by the advisor based on plan assets. These fees can be as low as a portion of a percent per year and can go up to nearly 2% per year, depending on the advisor and the level of service they provide.
- ETF and mutual fund expense ratios (0.25%-2% of the amount invested) – 401(k) investment options have their own costs that are automatically deducted from the fund as expense ratios. Sometimes these fees can be used to help offset other charges.
- Recordkeeping (0.15%-1% of plan assets) – Recordkeeping is often included in plan administration, and involves tracking deposits, disbursements, employer contributions, and plan expenses. Recordkeeping fees have traditionally been fixed costs, but more sponsors have been shifting recently to fees based on the number of assets in a plan.
- Trading Commissions ($5-$10 per trade) – If you have an option in your 401(k) to trade individual stocks and bonds, you’ll pay at least $4.95 per trade for US equities and $1 per bond for US bond trades.
401(k) Plan Investment Options
Most 401(k) plans have a selection of mutual funds and target date funds for participants to invest in, though some provide a brokerage option for trading stocks or bonds. Typically, participants can invest most cost-effectively in mutual funds or ETFs, with additional commissions charged on any trades in individual stocks or bonds.
Typical 401(k) investment options include:
- Mutual funds – These are the most common investment option in 401(k)s, with participants typically given six to sixteen funds to choose from
- Target date funds – More 401(k) plans have started including a few target date funds to choose from for employees who want to invest in funds that automatically change their balance between stocks and bonds as a target retirement date approaches
- ETFs – Some 401(k)s allow participants to invest in specific ETFs that can be indexed or include a basket of securities. Some ETFs are even less expensive than mutual funds
- Stocks – 401(k) plan sponsors can set up plans with some providers to include a brokerage option for trading individual stocks
- Bonds – If you set up a brokerage option to trade stocks in your 401(k), you can also allow participants to trade individual bonds
It’s also possible to have a self-directed account through certain online providers to invest in alternative assets like real estate or precious metals. Some providers even allow for checkbook control so you can invest in things like private equity or promissory notes.
401(k) Plan Contribution Limits
The 401(k) contribution limit for 2018 is $55,000, which is the same as 403(b)s and far higher than most IRA alternatives. In 401(k)s, contributions are a combination of employee salary deferrals ($18,500), employer matching ($18,500), and discretionary employer profit sharing ($18,000).
The three parts of 401(k) plan contributions include:
- Salary deferrals – Employees can defer a portion of their paychecks directly into a 401(k) plan as tax-free contributions.
- Employer matching – Though not mandatory, 401(k) plan sponsors have the option to set up programs for matching employee deferrals. Employers can match dollar-for-dollar or some percent, or a mix of the two.
- Profit sharing – An employer can make discretionary profit sharing contributions to the plan throughout the year or all at once after they get their year-end financial results. These profit sharing contributions are divided up among plan participants according to a predetermined formula in the plan documents, but not one employee can get more than $18,000 in profit sharing.
401(k) Plan Mandatory Matching
There’s no required matching in a 401(k). Employers can structure their own matching formula or have none at all. Employers can also provide discretionary profit sharing payments that are divided among plan participants according to a predetermined formula set forth in plan documents. Employees can deduct up to 100% of their salary or $18,500, and employers can match 100% up to the $18,500 limit.
403(b) vs 401(k): Rules and Deadlines
403(b)s and 401(k)s both have very specific rules for employers and employees, not only to determine eligibility but also to govern how employers and employees use these plans.
Some specific 403(b) and 401(k) rules and deadlines include:
403(b) Plan Rules and Deadlines
403(b) plans far more restrictive than 401(k)s or other retirement plans. The only organizations eligible for 403(b)s are churches, nonprofits, some public schools and healthcare systems, and public agencies. Contributions must be made before the end of the year and only employee deferrals and employer matching are tax-deductible. Any additional employer contributions are post-tax.
401(k) Plan Rules and Deadlines
Unlike IRA alternatives, 401(k) plans require recordkeeping and administration that includes annual compliance testing. 401(k)s are comprised of employee salary deferrals in addition to discretionary matching and profit sharing. Employee deferrals and company matching need to be made by year-end, while profit sharing contributions can occur after year-end as long as they’re before the employer’s tax-filing deadline.
403(b) vs 401(k): Ease of Use
The mechanics of using a 401(k) vs 403(b) are extremely similar, as is the ease of use. The biggest difference is the types of organizations that are able to use both types of plans.
403(b) Plan Ease of Use
403(b)s can only be used in limited circumstances and in certain ways. Only nonprofits, religious organizations, and public agencies like schools and healthcare systems can use a 403(b).
If you work for an employer like one of these and also have your own business, you can use your 403(b) in conjunction with a retirement plan through your own business. However, there are restrictions on how much you can contribute in aggregate.
Restrictions on how much you can contribute to a 403(b) in conjunction with another plan vary depending on a number of factors, including:
- How long you’ve worked at the employer with the 403(b)
- Whether your employer makes non-elective contributions to your 403(b)
- Your age, if you’re over 50 and eligible for catch-up contributions
- The type of other plan your eligible for, especially if it’s a 457(b) plan
- Your elective deferrals
- Any correct distributions from either plan you participate in
401(k) Plan Ease of Use
401(k)s are among the most difficult retirement plans for private businesses to use and yet are still easier than 403(b)s. 401(k)s have more potential investment options and are easier to use in conjunction with other plans, depending on the provider you use.
A few small business retirement plans that are easier to administer include:
403(b) vs 401(k): Customer Service
Customer service is similar for both 403(b)s and 401(k)s, with most issues handled through plan administrators. Specific customer service issues for 403(b)s and 401(k)s include:
403(b) Plan Customer Service
403(b) customer service issues are handled almost exclusively through plan administrators. Due to the restrictive investment options available through 403(b) plans, plan participants have almost no contact with investment providers. Some issues may be addressed by payroll providers as necessary.
401(k) Plan Customer Service
Customer service for 401(k) plans and participants is typically provided by plan administrators, though there may be some issues addressed by payroll providers. 401(k) participants tend to have more access to advisors and money managers, as investment options are more diverse.
403(b) vs 401(k): Providers
Although they’re structured and administered in a similar fashion, 403(b) and 401(k) providers vary widely and have very different offerings.
403(b) Plan Providers
Some of the top 403(b) vs 401(k) providers include:
TIAA is the largest 403(b) provider in the country, with between 40%-67% of all 403(b) assets, depending on the source. TIAA is an insurance and annuity company founded to serve teachers, researchers, and medical and government employees. The firm has more than $1 trillion in assets under management and continues to help teachers and other employees at tax-exempt organizations.
If you have a tax-exempt organization and are looking to set up a 403(b) to invest primarily in annuities, TIAA is a great provider that’s worth considering. However, if you want more diverse investment options or don’t run an educational, medical, or governmental organization, then TIAA may not be for you.
As the largest mutual fund company in the world, Vanguard provides a number of retirement plan solutions for private businesses and nonprofits. Among their other plan types, Vanguard helps qualifying organizations to set up and administer 403(b) plans according to their specific goals.
Vanguard is an ideal option for any employer who qualifies to have a 403(b) plan and wants to set up a plan that allows participants to invest in a group of conservative, well-managed, and cost-effective mutual funds and target date funds.
T. Rowe Price, a large asset management firm that has its own line of mutual funds and other investment products, also provides 403(b) plan administration and recordkeeping services. Professionals from T. Rowe Price can also be engaged to help pick investment options for plan participants.
T. Rowe Price also provides a host of investor education tools for plan participants. If you feel that your employees would benefit from these tools or make better investment decisions as a result of these resources, T. Rowe Price is certainly worth considering.
Fidelity is a full-service, diversified financial services company. The firm provides a full array of brokerage and banking services for small businesses and other entities, including 403(b) administration services.
For entities that want to set up a 403(b) and also need banking or other services, Fidelity is a great full-service option.
401(k) Plan Providers
Some reputable 401(k) providers include:
Thought it’s known primarily as a wealth manager, Charles Schwab has banking and institutional arms that provide 401(k) solutions for businesses. These services, which can be cost prohibitive for smaller plans, include plan design, implementation, and administration in addition to advising on investment options and selections.
If you need a full-service option that can help in provide individual investment advice or other services in addition to 401(k) administration, Schwab is a great option.
As a 401(k) provider, Vanguard is limited to being a manager of investment options for plan participants. Vanguard does not provide administration, recordkeeping, or investment advisory services. However, they are very established, reputable managers of mutual funds, target date funds, and ETFs that are great investment options for any 401(k) plan.
If you are setting up a 401(k) plan, be sure to consider including investment options from Vanguard. Some of Vanguard’s funds focus on international securities, while others are focused on stocks or bonds or invest aggressively or conservatively. A line-up of Vanguard funds in your 401(k) can provide plan participants with plenty of options to invest their retirement assets.
Fidelity is quite possibly the largest, privately-owned financial services company in the world. Known for its proprietary mutual funds, brokerage and wealth management services, Fidelity is another great one-stop shop for small business owners. Like Schwab, Fidelity also provides employee benefits solutions and can assist in plan design, administration, and advising.
If you have a relationship with Fidelity already or want a full-service alternative to Schwab that also has offices nationwide, Fidelity is a good provider.
Human Interest is an online 401(k) provider that emphasizes competitive, transparent fees for plan administration and recordkeeping. While they’re newer to the space, Human Interest is an alternative to the more traditional providers we mentioned above and might be a great fit for smaller companies looking for a fast, agile provider that can provide cost savings.
If you are deciding whether to use a 403(b) or 401(k), the decision is largely made for you. 403(b)s and 401(k)s are both retirement plans that offer substantial benefits to employers who qualify. They have the same contribution limits and similar administrative requirements, but 401(k)s are used by private businesses while 403(b)s are intended for tax-exempt organizations (including schools and nonprofits).
If you qualify for a 401(k) plan but you’re not sure whether or not it’s right for you, then you should read our article on the best business retirement plans. You can learn about all of your options and find the option that fits the needs of your business or employees the best.