Individuals employed by a hospital or other healthcare provider, or those employed by a non-profit corporation or a school or college are generally eligible to participate in a 403(b) plan. In contrast, individuals working for a private company are generally participants in a 401(k) plan. There are many differences in the types of plans, however, the underlying similarity is that both types of plans are made up primarily of contributions made by the employees from their salaries. As you will see, there are significant differences in how individuals approach these plans dependent on whether they are in a 401(k) plan or a 403(b) plan.
While the demographic profiles of participants in 403(b) plans and 401(k) plans are similar, there are several important differences. Participants in 403(b) plans are more likely to be female and to have an advanced degree. Overall distribution of income is similar, however, 403(b) participants are more likely to be clustered at the higher and lower ends of the income spectrum.
The retirement expectations of 401(k) and 403(b) plan participants are very similar. Both groups believe that their largest asset at retirement will be their retirement plan balance, exceeding the value of their home and other investments. About 40% have no retirement plan coverage other than the 401(k) or 403(b) plan, but 403(b) participants are more likely to be covered under a defined benefit pension plan (34% vs. 21%).
Individuals in 403(b) plans contribute less and are less active managers of the assets than those in 401(k) plans. Just 38% of 403(b) plan participants defer 6% of their earnings or more into the plan compared to 48% of 401(k) participants. Another example is that 35% of 401(k) participants transfer balances among funds annually while on 26% of 403(b) participants act similarly.
Participants in 403(b) plans are more conservative in their investment strategy than those in 401(k) plans. Fifty two percent of 403(b) plan participants define themselves as conservative compared to only 43% of 401(k) participants.
About half of each of these groups uses professional advisors to assist them with plan investment decisions. The primary advisor differs, however, based upon the plan types. Not surprisingly, 403(b) participants are most likely to use an advisor affiliated with their plan provider. This is because 403(b) providers have advisors available at the location of the plan to enroll the individual. Primarily this is due to the fact the employers that offer 403(b) plans generally give the option of several different providers to the individual employees. Advisors are seeking to encourage the 403(b) participant to use their product. In contrast, the employer of a private company chooses only one provider and 401(k) plan participants attend general enrollment meetings but do not always work one-on-one with an advisor provided by the plan provider. Therefore 401(k) participants are more likely to use an outside financial advisor that assists them with all of their households’ financial decisions.
It will be interesting to see how the behaviors of these participants may change if legislation will make the non-profit, public and private teacher retirement plans and the healthcare retirement plans more similar to 401(k) plans. Today the availability of pension plans assists many 403(b) participants in feeling they are approaching a comfortable retirement. In the future, 401(k) and 403(b) participants may be more similar.
Are you currently covered by a 403(b) plan or by a 401(k) plan? Regardless of the type of defined contribution plan offered by your employer, there are several issues to keep in mind.
1. Contribute to the greatest extent possible regardless of the type of plan available. Most individuals do not have adequate funds saved for retirement. These plans provide the ability to set aside money on a tax free basis. Use the plan as a fundamental component of your retirement savings.
2. Make sure you understand the retirement income sources that will be available to you. Many individuals do not understand that they do not have a pension plan. They may believe that the pension exists in addition to any contributory plan. Most people will not have the benefit of a monthly pension check upon retirement.
3. Assess the asset allocation that you have chosen and speak with a knowledgeable professional to ensure that it meets your needs based upon your age and other household income and savings. See if a target date or lifestyle fund, geared to invest on models based on your retirement date, is available.
Participants in all types of retirement plans, both 403(b) and 401(k) need to do significant planning to ensure that they are meeting their long term retirement needs.