Lightning

403b Plans are Worse Than 401k Plans

Most non-profit organizations can offer either a 403b or a 401k plan to help their employees save retirement.  Since for-profits cannot use the 403b plan they commonly use the well known 401k.

When I talk with non-profits, we generally discuss the pros and cons of using a 403b plan.  Even though there are many technical differences between the two, they are quite similar.  Yet there are key differences which impact their effectiveness.  A big advantage of the 403b plan is that it does not require the ADP test, which is applied in non-Safe Harbor 401k plans.  This is huge!  Without this test, the Highly Compensated Employees (HCE) – yes, non-profits do have HCE’s – will not have their personal contributions limited by the average of the non-Highly Compensated Employees (NHCE). Many for-profits use Safe Harbor 401k plans just to avoid this specific test.

Another advantage of the 403b plan is that employees who work for more than 15 years can use a special catch-up provision.  Known as “Cap Expansion,” they can save an additional $15,000 more in their accounts (no more than $3,000 a year) after 15 years of service.

Other administrative requirements between 403b and 401k plans are similar.  But if you think they would be charged about the same to administer and support, you would be wrong.

With all of my experience with non-profits, I know fees in many of their plans are just awful.  I mean really, really bad. I think it has to do with the fact that the 403b has been around longer than the 401k and was originally targeted by many insurance carriers.  Many 403b plans have been using annuity based products or other broker-based products with excessive sales or AUM charges. Unfortunately, these excessive fees damage how much their employees accumulate for retirement.

How did this happen?  I don’t know.  Maybe they were just easier targets for the agents back in the day and many of these relationships are still dominant to this day.

Another possibility might be non-profits willingness to provide guidance to staff.  I believe that non-profits tend to be more supportive of their employees receiving personal guidance than comparable for-profit businesses.  This is to be commended.  Unfortunately, the fees for this support are disproportionately large to the amount of real guidance the employees receive.  The fees are not directly tied to the services provided – they are just wrapped into the insurance product, investments, or assets under management.

And to top it off, many of their employees are sold additional products and services – that are also overpriced!  It’s a double whammy.  

There are plenty of overcharged 401k plans.  But 403b’s have it worse!  Small non-profits can have much better plans – but it is up to the plan sponsors to get rid of the crappy, fee-laden providers that overcharge their plans and their employees.

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