(How) Are 403(b) Plans Different from 401(k)s?

The primary difference between 403(b) plans and 401(k) plans is the type of employer offering the plan, but a couple of new surveys from the Plan Sponsor Council of America (PSCA) highlight some interesting design differences as well.

Believe it or not, 403(b) plans have been around longer—since 1958. 401(k)s didn’t arrive until 1978 and really were not effective until 1981 (see Talking Points: An ‘Unintended’ Consequence).?

Like its 401(k) cousin, it was initially created under part of the Internal Revenue Code (Section 403(b)!)., and—like the 401(k)—it was designed to allow employees of certain tax-exempt organizations, such as public schools, hospitals, and religious institutions, to contribute to retirement savings on a tax-deferred basis.?

Over time, many of the things that differentiated the two (notably contribution limits) have been eliminated or at least narrowed. That said, their different histories and distinct employee populations mean that notable plan design differences remain.

What’s the Same (or Pretty Close)

According to PSCA’s 2024 403(b) Plan Survey, a quarter (24.4%) of 403(b) plan respondents now use auto-escalation, and another fifth (20.2%) permit voluntary escalation. That’s pretty consistent with findings from the (soon-to-be-published) 67th Annual Survey of Profit-Sharing and 401(k) plans, where 24.2% use automatic escalation for all participants, 8.9% do so for “under-contributing” participants, and 30.1% permit voluntary escalation.

One area in which 401(k) plan designs have traditionally lagged is periodic distribution options. However, perhaps due to the recent focus on retirement income, this gap has narrowed significantly.?

Among 401(k) plan respondents, two-thirds (68.8%) now offer a retirement periodic option (though 83.2% of the largest plans do), nearly identical to 403(b) plan respondents where 67.7% offer the periodic payment option, as do 91.2% of the larger plans.??

Another area of striking consistency is financial wellness programs. A quarter of responding 403(b) organizations provide financial wellness programs to employees—but that’s 44% of the largest plans (> 1000 workers) versus 10%-ish for plans with less than 200). Most (59%) deliver that online.? As for 401(k) employers, 27.1% provide those overall, versus 52.8% at the largest plans (and in the teens for those with 200 employees or less.

Most 403(b) plan organizations (78.4 percent) monitor at least one participant behavior. The most common behavior monitored by those plans was participant deferral rates (60.6 percent of plans), followed by loans (55.6%) and hardship withdrawals (51.4 percent of plans)—mirroring the tendency among 401(k) plan sponsors (78.3% deferral rates, 56.9% loan usage, and 50.9% hardship withdrawals).

What’s Different?

According to PSCA’s survey, while there has been movement in investment policy statements, only about half of 403(b) plan survey respondents (57%) have an IPS in place—though, in fairness, a full third (32.4%) didn’t know. Contrast that with the (soon-to-be published) 67th Annual Survey of Profit-Sharing and 401(k) Plans, which found those in place at 82.4% (here again, 12.5% weren’t sure, however).

Of course, there’s having the IPS to provide structure, and then there’s the frequency of review.? Among 403(b) plan respondents, annual was the most cited frequency (44.5%), with quarterly (34%) ranked second. Among 401(k) respondents, quarterly (64.8%) was the most common (even more so among larger plans), and annual was a distant second, cited by just 16.2%.

Automatic enrollment is (slowly) gaining traction in 403(b) plans; use increased yet again and is now available in 35.5 percent of plans — that’s up a third in just two years. Here, as with 401(k) plans (63.8% overall and 74.3% among the largest), more than half of large organizations employ automatic enrollment in contrast to just 21 percent of small plans, which is up from just eight percent of small plans a year ago.

Three percent of pay remains the most common default deferral rate among 403(b) plan respondents, used by 32.1 percent of plans, while 30.2 percent have a default rate greater than that.? Meanwhile, a default rate of more than 3% was already the default for two-thirds of 401(k) plan respondents to the 2023 survey.

Considering their history, it should be no surprise that 403(b) plans were much more likely to provide an annuity option; 56.7% overall and 70.6% of the larger plans do so for retirement.? That contrasts with 401(k) plans where the availability is half that—29% overall and 36.6% among the larger plans.

Another unsurprising difference can be found in the availability of ESG funds on the plan menu; just 6.4% of 401(k) plans did so in the 2023 401(k) survey, whereas those options were found at nearly four-in-10 403(b) plans, irrespective of plan size.?

Among 403(b) plan respondents, 42% offer a managed account option (29% of participants use it when offered) versus 50.4% of 401(k) plan survey respondents (68.5% among larger plans).

Oh – and one big difference not captured on these surveys – 403(b) plans (still) can’t invest in collective investment trusts (CITs).?Apparently, some think that several decades of experience with 401(k)s isn’t enough for 403(b) adoption.

Of course, these similarities – and differences – are viewed from a macro lens.? We tend to talk about 401(k)s (and 403(b)s) as though these plans are designed and administered for the benefit of monolithic entities, but the industries and demographics for which these designs are applied are vastly different.?

Particularly in the 403(b) market, those differences often include whether a traditional defined benefit plan is part of the benefits equation—and that makes a huge difference in terms of positioning and ultimate benefits delivery—something that should always be considered in any kind of side-by-side comparison.?

Still, it’s good to know—and appreciate—not only the differences but the options and the rationale behind them as we work together to help support, expand, and enhance the nation’s private retirement system.