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403(b) Plan vs 401(k)

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 27, 2022

401(k) plans and 403(b) plans are both retirement plans designed to help employees save in a tax-deferred manner.

The main difference is that 401(k) plans are offered strictly to employees in the private sector, while 403(b) plans are offered to non-profit organizations that are governed by Section 501(c)3 of the Internal Revenue Code.

These include schools, hospitals, religious organizations and even some governmental organizations.

If you're wondering which type of plan is better, your question is likely a moot point, because you'll automatically be offered (assuming the employer offers this) either one type of plan or the other.

You will never be offered a choice between these two types of plans from the same employer.

If you work two jobs and have one employer in the private sector and the other in the non-profit sector, then you may have this choice.

In that case, the better option will depend upon the investment choices offered in each type of plan.

Difference Between 403(b) and 401(k) Plan

Here is a breakdown of the differences and similarities between the two types of plans: Similarities:

  • Both plans have the following characteristics in common:
  • Identical annual contribution limits, including catch-up contributions
  • Tax-deferral
  • Pretax contributions
  • A preset selection of investment choices
  • Loan provisions (which can vary to some extent by plan)
  • Required minimum distributions starting at age 72
  • 10% early withdrawal penalty for distributions taken before plan participant reaches age 59  ½, unless a qualified exception applies
  • Regular distributions are taxed as ordinary income (at the participant's top marginal tax bracket)
  • Contributions are deducted from from employee's paycheck and deposited directly into the plan
  • Roth feature is permitted
  • Matching employer contributions
  • Vesting schedules
  • Identical portability and rollover provisions in most cases

Differences:

  • Although these two types of plans are similar in many ways, they also have a few differing characteristics, listed as follows:
  • 403(b) plans have a Maximum Allowable Contribution (MAC) rule that allows plan participants with at least 15 years of service to their employer to contribute an additional $3,000 per year to the plan. However, employers are not required to add this feature. Apart from this rule, all contribution limits are identical.
  • 401(k) plans usually have a wider selection of investments to choose from. They often offer mutual funds, annuities, stocks (especially company stock), ETFs and money market funds. 403(b) plans usually only offer annuities and mutual funds, because there is stricter oversight with these plans concerning the amount of investment risk that employees can take.
  • 403(b) plans tend to have less regulatory oversight than 401(k) plans. The former type of plan was introduced in 1958, while 401(k) plans didn't come along until 1978 with the passage of the Revenue Act of 1978. 401(k) plans are governed by strict fiduciary standards, while 403(b) plans are not governed by ERISA regulations except in certain circumstances (see below).
  • Although 403(b) plans are allowed to make matching contributions, they usually don't do so because this will cause the plan to fall under ERISA oversight. And plans that do offer matching contributions usually offer a smaller match than most participants in 401(k) plans get.
  • Because 403(b) plans are usually limited to offering mutual funds and annuities as investment choices, their participants usually end up paying higher fees on average than 401(k) plan participants, who often have access to very low-cost alternatives such as ETFs and index funds.
  • 403(b) plans usually have lower administration costs than 401(k) plans because they are usually not required to adhere to ERISA guidelines.

Although both plans can contain vesting schedules, this schedule usually lasts for 5-7 years in a 401(k) plan, while vesting in 403(b) plans is usually immediate.

403(b) Plan vs 401(k) FAQs

What is a 401(k) plan?

A 401(k) plan is a retirement plan offered by an employer designed to help employees save for retirement.

What is a 403(b) Plan vs 401(k)?

The main difference is that 401(k) plans are offered strictly to employees in the private sector, while 403(b) plans are offered to non-profit organizations that are governed by Section 501(c)3 of the Internal Revenue Code.

What is the difference between a Roth 401(k) and traditional 401(k)?

With a Roth 401(k), taxes are paid as money is put into the retirement account. With a traditional 401(k), taxes are paid as money is taken out.

Are there other retirement savings plans other than a 401(k) plan?

Alternatives to 401(k) plans include traditional IRAs, Roth IRAs, pension plans (if your employer offers one), and 403(b) retirement plans for employees of non-profit organizations.

About the Author

True Tamplin, BSc, CEPF®

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True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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