When it comes to offering retirement plan benefits, however,
both types of plan sponsors share the goal of wanting to improve the retirement
readiness of their participant populations. Nearly all (99%) executives say
they’re committed to employee retirement savings, with 29% saying they are very
committed to that goal, according to a March report from PNC Institutional
Asset Management.
While there are regulatory differences between 401(k) and
403(b) plans, there are also differences in plan sponsors’ retirement and
financial benefit offerings. Some of those differences reflect long-term trends
stemming from the genesis of each type of plan, while others may have more to
do with the resources that each has available to invest in their plan.
Here’s a look at certain differences between 401(k) and
403(b) plans. One important caveat to note: Not all 403(b) plans are compliant
with Employee Retirement Income Security Act regulations. That makes it much
more difficult to gather data or get a full picture of 403(b) plans, since
they’re not required to file Form 5500s with the Department of Labor.
For-Profit Plans Are More Likely to Offer a Match on
Employee Deferrals
The PNC report found that for-profit companies are slightly
more likely to make contributions to their employee retirement plans (93%) than
are nonprofit organizations (79%). In both types of plans, the larger the plan,
the more likely the plan sponsor was to offer a match on employee deferrals.
That lower contribution rate on the 403(b) side could reflect
several factors, says Tim Rouse, executive director of the SPARK [Society of
Professional Asset Managers and Recordkeepers] Institute, a trade association
for the retirement plan industry. One such factor is that, by their nature,
for-profit organizations may have larger budgets with which they can make such
contributions.
Another reason is that many 403(b) plan sponsors also offer
other retirement benefits to their participants, such as pension plans. “In
that case, the pension plan is where the employer is making the retirement
contributions,” Rouse explains. “And the 403(b) is just a supplemental savings
vehicle, whereas in the 401(k) world, that is the sole retirement plan for the
participant.”
Indeed, about 60% of 403(b) participants said that it was
their only retirement plan, compared to 80% of 401(k) plan participants who
said the same.
403(b)s Tend to Have a Larger Investment Menu Than
401(k)s
An April analysis by the Government Accountability Office
found that ERISA-regulated 403(b) plans have an average of 32 investment
options, compared to an average of 21 in 401(k) plans.
One reason that 403(b) plans may have more investment
options, Rouse says, is that many 403(b) plans began as non-ERISA plans, which
typically facilitate individual contracts between providers and participants,
rather than group contracts between the plan sponsor and the provider. “So you
still have a lot of individual contracts and multiple vendors in the 403(b)
world,” Rouse says. “You just don’t see that in the 401(k) world.”
As more 403(b) plan sponsors take on a larger fiduciary
responsibility, they’re shedding vendors over time and offering a more
streamlined investment menu, according to Rouse.
The offerings within 401(k) and 403(b) plan menus differ as
well. Many 401(k) plans have begun offering lower-cost collective investment
trusts in recent years, an option that’s not currently available under law to
403(b) plans, which can only offer mutual funds and annuities.
For-Profit Plan Participants Are More Likely to Have
Outstanding Loans
The 2021 PLANSPONSOR Defined Contribution Survey found that
just 7.3% of participants in 403(b) plans had an outstanding plan loan at the
time of the survey, compared to 12.4% of participants in all plans. One factor
in lower loan usage may be plan design, since more than half of 403(b) plans
restrict participants to having no more than one outstanding loan at a time
from their plan, Rouse says.
In this instance, 403(b) plans may have an edge over 401(k)
plans when it comes to retirement readiness. Defaulting on a plan loan can
result in $300,000 in lost retirement security over the course of a
participant’s career, according to an analysis by Deloitte.
Nonprofit Plan Sponsors Are Less Likely to Offer
Financial Wellness Education
Six in 10 for-profit companies offer financial education to
employees, compared to just over half of nonprofits, according to PNC. That
said, among those that do not currently offer financial wellness to employees,
36% of nonprofit plan sponsors say they’re planning to do so, while 22% of
for-profit plan sponsors said the same.
“I think employers are stepping up because they realize that
with a more remote workforce, they need to do more to get people engaged with
the retirement plan,” says Alistair Jessiman, head of PNC Institutional Asset
Management.
Participation rates in financial wellness programs at 403(b)
plans also tend to be lower than participation rates at 401(k) plans, the PNC
research found.
“The numbers are still not as good on the outcomes if people
aren’t participating in the education part,” Jessiman says. “There’s a high
correlation between the education and participants taking advantage of things
like getting the match and other tools designed to help them.”
Use of Automatic Enrollment in 403(b)s Lags Use in
401(k)s
The percentage of 403(b) plans implementing auto-enrollment
features is inching up, rising to 42% in 2021 from 37% in 2017, according to the
PLANSPONSOR Defined Contribution Survey. But that rate remains far below the
60% of 401(k) plans that use auto-enrollment, according to the DCIIA Retirement
Research Center.
Wendy Davis, vice president of retirement strategy,
non-profits at Transamerica, says she encourages 403(b) plan clients to follow
the example of their for-profit peers in this case, citing auto-enrollment and
its cousin, auto-escalation, as best practices for all retirement plans to
consider if they want to boost participation rates.
“Our data show that most employees do not opt out, even when
their default deferral and escalation rates are fairly aggressive,” she says.
“Even so, if an employee opts out of auto-enrollment, they are reminded each
year about the benefits of joining the plan.”
Another reason for lower use of auto enrollment in 403(b)
plans is that many states limit the ability to automatically deduct money from
employees’ paychecks.
Number of 403(b) Plans Downs, Number of 401(k)s Growing
The total number of ERISA 403(b) plans has inched downward,
falling to 20,900 plans in 2020 from 21,900 a decade earlier. By contrast, the
number of 401(k) plans has continued to grow, to 595,000 from 510,000 over the
same period, according to a GAO report.
One factor contributing to there being fewer 403(b) plans,
according to the GAO, is the significant merger and acquisition activity in
recent years that has occurred in the health care sector, which employs a large
share of 403(b) plan participants. Health care industry 403(b) plans
represented the most quickly shrinking sector, with the number of 403(b) plans
at health care organizations falling by 10.4%, even while the total number of
assets in that sector grew by 140%.
Despite all these differences, the gap between savings in
403(b) plans and 401(k) plans is shrinking. In the third quarter of 2021,
403(b) savers had an average account balance of $110,800, according to
Fidelity, about 88% of the average 401(k) balance of $126,100. That’s more than
double the amount that 403(b) savers had in their account in the third quarter
of 2011, when they had saved an average of $50,100, or just 78% of the average
401(k) investor.
That might reflect a growing reliance among some nonprofit
workers on their 403(b) plan as a more primary means of saving for retirement.
“Even for teachers and others in the not-for-profit world,
the days of healthy, traditional, employer-paid pensions plans are dwindling,”
Davis says. “Generous pensions plans were one of the biggest rewards of working
in the not-for-profit sector, but today everyone needs a retirement strategy,
regardless of the sector in which they work.”
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