403(b) and 401(k) Plans - A Comparison

By Richard Shafer Madison

Introduction

As executive director of Well and Good LLC in Madison, Wisconsin, Richard Shafer advises fiduciaries of retirement plans large and small, nationwide. Richard Shafer of Madison comes to his role backed by an in-depth knowledge of the defined contributions plans and their place in the retirement planning industry.

401(k) plans have become one the most popular means to save for retirement in the United States today especially for employees of for-profit companies. Those working for non-profit organizations may obtain many of the same benefits through an employer-sponsored 403(b) plan.

403(b) and 401(k) Plans

When a plan is established under Code section 401(k)or 403(b), employees may arrange to set aside a portion of their pay into a tax-deferred retirement savings account. The employer has a fiduciary responsibility to timely invest plan assets and to select the account(S) available. At the same time,the fiduciary must monitor plan fees or costs costs in light of benefits received by the plan and participants. A 403(b) plan may invest in annuities or mutual funds, while a 401(k) plan may invest in specific securities.

Employers may contribute to either type plan, with or without a "matching" contribution. Generally, a 403(b) plan entails somewhat easier operational compliance, nondiscrimination testing is simpler than for a 401(k) plan for example. Overall, after concerted decision-making by the IRS and Department of Labor, the fiduciary responsibilities are very similar.