In this article, we’ll cover:

• History of 403(b) plans

• Differences between 403(b) and 401(k) plans

• Similarities between 403(b) and 401(k) plans

• Which to invest in given both options

Amongst all the discussion about 401(k) accounts, those in public schools, government work, and certain charities rely on a different retirement account, the 403(b).

403(b) plans actually originate well before the creation of the 401(k). 403(b) plans started with public education employers in 1961, but only allowed investments in annuities. By 1974, the plan allowed for the addition of mutual funds. The purpose of 403(b) plans was to allow public employees to supplement their retirement savings voluntarily using pre-tax dollars. Today, roughly $1 trillion dollars in assets sit in 403(b) accounts.

Differences

There are several practical differences between a 403(b) and a 401(k) in how they operate. First, 403(b) plans often vest quicker than 401(k). This means ownership of the funds contributed by your employer are transferred to you in a shorter period of time than most 401(k) plans. This is advantageous because switching employers means any unvested funds are returned to your employer, a quicker vesting period allows you to keep more of the employer’s contributions.

Despite a faster vesting schedule, 403(b) plans typically have a much smaller match from the employer. Therefore, employees will need to stay longer to gain the benefit of a shorter vesting period. 403(b) plans are also limited to annuities and mutual funds only, meaning you cannot invest in individual stocks, ETFs, or REITs like one can in a 401(k) plan. 403(b) plans are typically administered by insurance companies unlike 401(k) plans which are administered by investment management companies.

403(b) plans are also exempt from the Employee Retirement Income Security Act (ERISA). This exemption allows for 403(b) plans to ignore non-discrimination requirements, specifically surrounding prevention of preferential treatment towards certain employees.

One last difference between the two plans is the ability of 403(b) plan members to contribute an extra $3,000 per year to their plan up to a limit of $15,000 if they have worked for the same organization for at least 15 years.

Similarities

Employer Match

There are different methods of matching and match percentages. The first is a full (100%) match. For example, an employer might match 100% of your contributions up to 4%, meaning they will match your contribution dollar for dollar up to 4% of your salary (i.e. a salary of $100,000 with a 4% contribution would be a match of $4,000 for a total of $8,000). Partial matching means your employer will match part of the money contributed to your plan up to a certain amount. For example, a salary of $80,000 per year and contribution of 6% with an employer matching 50% of your contributions up to 6%, would equal $7,200 in 403(b) dollars ($4,800 contribution and $2,400 matched by your employer).

If nothing else, always contribute up to the employer match.

Contribution Limits

Contribution limits for 403(b) plans and 401(k) programs are the same:

Required Minimum Distributions

Both 403(b) and 401(k) plans have Required Minimum Distributions (RMD) starting in the calendar year in which the individual reaches age 72. To get a rough estimate of how much an RMD is, use this IRS calculator.

Loans

403(b) and 401(k) loans let you borrow money from your retirement account and pay it back overtime. These loans come with interest, but the beneficial part is those interest payments simply go back into your account. Typically, loans allow you to withdraw 50% of your contributions up to $50,000 over a 12 month period, with the requirement to pay this money back within 5 years of the loan including interest. Another benefit of these loans is that any missed payments won’t affect your credit score, since you are simply paying back yourself. The bad news is the loan will likely need to be repaid before leaving your current job. If you are unable to pay back the loan before you leave your employer, you may owe a 10% penalty on the amount withdrawn if you are under age 59 ½. Please keep in mind that any money taken as a loan from your retirement account requires you to liquidate that amount in assets. Therefore, the amount you are using as a loan is not invested and will not be exposed to the gains (or losses) in asset value.

Here is a chart listing the similarities and differences between the two plans:

Special Considerations

Some individuals may find themselves in a situation where they have access to both a 401(k) and a 403(b) if they work for a private and public employer, respectively. These individuals are able to invest in either plan, however the combined contribution amount is still limited to $22,500 for tax year 2023 (not including catch-up contributions for those eligible). Which plan you contribute to depends on the plan offered and the time you think you will stay at each institution. However, the larger range of investment options provided by a 401(k) plan will likely be more beneficial than the 403(b) plan–especially if you plan to stay at that company for a long period.