Favorable Features of 403(b)
403(b) plans have been known to receive a bad rap – related, in part, to the difficulties surrounding the public K-12 marketplace with which they are associated, and also due to the perception that they are a step behind 401(k) plans with respect to marketplace innovations.
Despite these challenges, there are several distinctive features of 403(b) plans that may give them a leg-up on other types of plans.
- Voluntary contributions up to the legal maximum are permitted for all employees — While most 401(k) plans are subject to Average Deferral Percentage (ADP) testing - which can prevent the ability of high earners to contribute the maximum to their plan - 403(b) plans are free of these restrictions and, in general, permit all employees to voluntarily contribute.
- Loan repayments can continue upon employment termination — In most 403(b) plans, it is allowable for employees to continue making loan repayments (via Automated Clearing House (ACH) checking account deduction) following employment termination. Contrast this with 401(k) plans, where plan sponsors may require employees to repay the full outstanding balance or treat it as a retirement distribution, which can be costly and have long-term negative impact on retirement wealth.
- Investments are limited to annuities and mutual funds — While at first glance this may not appear to be a benefit, it can prevent 403(b) plan participants from making rash investment decisions that can wreak havoc on account balances. Other types of retirement accounts permit participants to chase the market or partake in other types of imprudent investing.
- Environmental Social and Governance (ESG) funds are often an option — Many 403(b) plans include at least one ESG fund in their investment array. This is in stark comparison to 401(k) plans, where only three percent offer ESG investments.
- Annuitization is often an option — Unlike 401(k) plans, where in-plan annuities are fairly uncommon, 403(b) plan participants often have the ability to convert all or some of their account balance into a stream of income in retirement. While annuities can be complex and expensive, in-plan annuities are often advantageous over annuities purchased in the retail marketplace.
- No top-heavy considerations — In 401(k) plans, a retirement plan is considered top-heavy if the total retirement account balance of key employees (i.e., higher paid employees) is more than 60 percent of the total value of overall plan assets. Top-heavy rules – which ensure a plan does not disproportionately favor certain individuals over lower-paid employees – trigger complicated testing that can be burdensome and expensive, particularly for smaller 401(k) plan sponsors. 403(b) plan sponsors, however, do not have to have to be concerned with these rules.
- 403(b) plans can be paired with 401(a) plans — Since there are separate 415 limits for 401(a) and 403(b) plans (with limited exceptions), a combination of these plans allows for greater contributions than normally permitted under the law. 401(k) plans are ineligible to be paired with another plan to increase the 415 limits (however, both 401(k) and 403(b) plans can also be paired with 457(b) plans to increase elective deferral limits).
While there are certainly benefits to other types of plans as well, 403(b) plans have some unique elements that may make them a better choice for plan sponsors who have the ability to select between plan types.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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