401(k)s, 403(b)s and 457s Compared, Contrasted

While 401(k)s are ubiquitous in the for-profit sector, 403(b)s and 457 plans rule the roost among non-profits. At an Oct. 24 session of the ASPPA Annual Conference, PenServ Plan Services, Inc. President Susan Diehl provided a glimpse into the world of 403(b)s. 

Diehl addressed revenue streams from the non-profit sector, for which 403(b) and 457 plans are intended, and outlined some of the ways they differ from 401(k)s, as well as how the current climate affects them. 

Some non-profits offer 401(k) plans, but “many were sold 401(k)s without realizing 403(b)s exist,” Diehl said. Others were given incorrect information; for instance, being told that they could not make an employer contribution to 403(b)s. 

Despite their relative obscurity compared to their more flashy counterpart, 403(b)s actually have been growing in number for the better part of a decade, Diehl reported, and collectively hold assets that have grown from $750 billion in 2010 to $1.1 trillion just six years later. 

Vive la Difference

While 403(b)s and 401(k)s both serve as vehicles for retirement saving and employers can make contributions to both, there are key differences, which Diehl outlined: 

• Ability to force distributions. Diehl noted that unlike 401(k) sponsors, employers that make 403(b)s available cannot force distributions. In fact, she said, that means that such employers must continue to work with vendors they have deselected if those vendors still hold 403(b)s belonging to that employer’s employees — and the deselection does not mean that employer can force the distribution of funds from those 403(b)s so it can sever ties with deselected vendors once and for all. 
• Cafeteria plans. It is not possible to offer 403(b)s through a cafeteria plan operated under Code Section 125. They are not listed among the many benefits that can be made available through such plans. 

• Availability. Universal availability applies to 403(b) elective deferrals, and eligibility is immediate; for 401(k)s, on the other hand, the ADP test applies to elective deferrals for 401(k) plans and eligibility is not automatic.

• Investments. Other than church 403(b)(9) plans, 403(b) funds can only be invested in annuities or mutual funds, whereas 401(k) funds can be invested broadly unless a prohibited transaction is involved.

• ERISA. Governmental and church 403(b) plans are not subject to ERISA, and 501(c)(3) entities may be exempt from ERISA under certain circumstances, whereas 401(k)s with even one participant are subject to ERISA.

• Late deferrals. Internal Revenue Code Section 4975 and the excise tax for the plan asset rule do not apply to 403(b)s, so they are never subject to late deferral penalties. 

• Form 5330. It is not required that 403(b) plans are not required to file the Form 5330 in order to report late deferrals. However, Diehl said, the instructions for the form do not say so. She reported that she has asked the IRS if it would change the instructions to say so, and it has agreed to do so, but it has not yet made such a change.   

Changing Times

Market opportunities in the non-profit sector are growing, Diehl said, noting that many employers that make 403(b) plans available are shopping around after decades of not doing so. Why? “Because they are comparing fees and services,” said Diehl, who added, “fees are one thing, but they also need to know about services.”