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How does my 403b plan differ from the 401k I had previously?

Jan 05, 2012 by Marilyn from Missoula, Mt in  |  Flag
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Here is some useful info on the difference between 401(k) and 403(b) plans. 403(b) plans may be structured two different ways; 1) Non-ERISA voluntary plans, typically used by educators and have multiple providers available for their participants, usually set up in annuities 2) ERISA 403(b) plans use one provider and are more similar to a standard 401(k) plan structure.

ERISA 403(b) plans also must use registered investments such as mutual funds, where as 401k plans can use sub accounts available through group annuities or they may use registered mutual funds like 403(b) plans. 403(b) plans also must use a custodial trust to hold the assets which can increase the cost of administration. Another difference between 401(k) and 403(b) plans are the testing requirements. For 401(k) plans, an annual nondiscrimination test, referred to as an Actual Deferral Percentage (also known as an ADP test) is required to be performed. The ADP test compares the average deferral percentage of non-highly compensated employees to the average deferral percentage for highly compensated employees. This test does not apply to 403(b) plans, which are nondiscriminatory if eligible employees are permitted to make salary reduction contributions of at least $200 per year.

Generally I recommend clients who are eligible to have a 403(b) plan to go with that option as the required ADP test for a 401k plan can cause issues like being Top-Heavy if the plan does not pass the test.

Comment   |  Flag   |  Mar 06, 2015

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Kevin J. McNab Level 19

Agree with the previous answer. A 403(b) works very much the same as a 401(k) from an investor's perspective. However, the fund expenses can be much higher for a 403(b). Hopefully, you have access to a provider such as TIAA-CREF with low cost option.

Comment   |  Flag   |  Jan 30, 2013 from Westminster, CO

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Jason Hull Level 20

403bs also have different contribution limits depending on your age. You can check out the IRS guidelines for the contribution limits here: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---403(b)-Contribution-Limits

Comment   |  Flag   |  Jan 30, 2013 from Fort Worth, TX

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You can make tax-deferred contributions into either a 401K or 403B...401K's are usually in the private sector and 403B in the public sector...the employer plan document details who are the approved provider's within your employer's plan...an asset allocation model based on your risk profile is the most important step for your long term portfolio results...

Comment   |  Flag   |  Jul 04, 2013 from Bordentown, NJ

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Rich Winer Level 20

If you have a 403b plan, beware of financial advisors pushing fixed or indexed annuities (aka tax sheltered annuities or TSAs)! Too often, insurance agencies have cozy relationships with school systems and other 403b plan providers which gives them easy access to plan participants who are often inexperienced, unsophisticated investors and easy prey for advisors whose primary interest is selling them inappropriate, expensive and illiquid investments. Too often, these annuities are sold to people who are 10 to 30 years away from retirement and would be better off in stock and bond mutual funds. When I've confronted these agents and asked them why they recommend annuities to almost everyone, the response I usually get is "Teachers are conservative, so they want something safe and guaranteed." My response is: They're not all conservative. Most are inexperienced and scared of investing in stocks. They need to be educated about their investment options and investing in general. A good financial advisor will educate his or her clients and only recommend the best, most appropriate investments for their clients' needs and objectives. Too many advisors who specialize in the 403b market are only interested in selling the one investment that pays them the highest commission... Tax Sheltered Annuities. If the advisor to your 403b plan is recommending annuities to you and everyone else, RUN and find another advisor.

Comment   |  Flag   |  Apr 18, 2013 from Woodland Hills, CA

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Generally…The same rules except for Catch Up Contributions $17,500 for 2013 and 2014; if age 50 or older, $23,000 (includes $5,500 maximum catch-up contribution)

15 Year Rule: The plan may also offer a catch-up contribution for employees with at least 15 years of service. Contributions can be as high as $20,500 for 2013 & 2014, plus they can make a catch-up contribution if they are age 50 and older, for a total of $26,000

Also, ETFs offered through 403b plans must be classified as Registered Investment Companies.

Comment   |  Flag   |  Jul 07, 2014 from Irving, TX

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It depends on the carrier...403(b)'s are often annuity based. From a tax perspective, the contributions and rollover guidelines are the same.

1 Comment   |  Flag   |  Jan 05, 2012 from Boston, MA
Brice Thompson, AWMA, AAMS

The only real difference is that 403(b)s are provided by non-profit organizations and 401(k)s are provided by for-profit companies. They are rollable to IRA's the same as 401(k)s.

Flag |  Apr 13, 2012 near Columbus, GA

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