401k vs 403b – What’s the Difference in these Retirement Plans?

retirement plan bookOn my first day at my first job out of college, I was given a big packet of information about my benefits, including health insurance and retirement. I’d read about the 401k beforehand, but my packet instead had information on a 403b retirement plan. I was confused – what is a 403b, what’s the difference, and why did I get a 403b instead of a 401k?

A 403b is a tax-deferred retirement plan that is very similar to a 401k. That is, it allows you to set aside pre-tax dollars out of your paycheck to save for retirement – up to $16,500 per year, and for some people, the limit may be higher.

The 403b is administered by a financial management company chosen by your employer (or one of several they’ll allow you to choose from) and you select mutual funds and annuities to invest your money.

Difference between 401k and 403b


The basic difference is that a 403b is used by nonprofit companies, religious groups, school districts, and governmental organizations. The law allows these organizations to be exempt from certain administrative processes that apply to 401k plans. In other words, administrative costs for a 403b are lower. This allows organizations with very small budgets to help their employees save for retirement.


The difference in cost between a 401k and a 403b can be either small or substantial. Your cost will be determined by what you invest in, the level of service the management company provides, and who the company is.

For example, a variable annuity in either plan will take a bite out of your earnings, as its associated fees are typically high. That said, 401k administrative costs can be much higher than those of a 403b, regardless of the investment inside. To find out how much you’re paying for your plan’s administration, you’ll probably have to look beyond your statement, as the information usually isn’t visible there.

In either plan, find out how much the investment itself – mutual fund or annuity – is charging as well. If necessary, get on the phone with whoever handles retirement at your workplace, or with the management company itself. You don’t want unnecessary fees eating up a large portion of your retirement fund. Other than cost, differences are minor between the two plan types and will probably have little bearing on your investments.

Elective Deferral Limits

Both 401k and 403b plans have limits on how much an employee can contribute to them (i.e. maximum 401k contribution limits). For 2011, the standard elective deferral limit is $16,500 for both plans. Further, both allow “catch-up” contributions for employees age 50 and older. These workers can contribute up to a total of $22,000 for 2011, or an additional $5,500.

However, in a 403b plan, some workers with at least 15 years of service can add another $3,000 to their deferral limit each year. This option must be written into the specific 403b plan, and workers are no longer eligible once they’ve contributed a total of $15,000 under this rule. Employees with a 401k plan do not have this option available to them.

Investment Options

As with a 401k, the investment options available inside the plan are usually selected by the financial management company or by your workplace. If you would like different investment options, you can ask your employer to make them available to you. You may also be eligible to open a traditional IRA or a Roth IRA on your own if you want to invest additional monies, or invest in a different way.

If you choose  not to participate in a 403b or 401k plan, make sure you’re not foregoing an employer match. As an employee benefit, your employer may match a percentage of what you contribute to the plan, or the full amount. This is essentially “free money” for retirement and should not be given up lightly.

In the past, 403b plans restricted their participants’ investment options primarily to variable annuities. However, this restriction was removed years ago, and now most 403b plans let you invest in a wide variety of mutual funds and annuities.

Do I Get to Choose Which One I Want?

Most workplaces that qualify to offer a 403b will do so because the administrative costs are lower. However, you aren’t able to open a 401k if your employer doesn’t offer it. In other words, you don’t get to choose which plan you want. At my first job, I had a 403b because I worked for a state hospital, which, as a government entity, was eligible for this plan.

Final Word

Whether your job provides a 401k or a 403b, it’s important to evaluate the available investments and understand the expenses and the administrative costs of the overall plan. From an informed position, you can best decide where and how to invest your money. Keep in mind that when an employer match is available, contributing to an expensive plan may still be a smart move.

What kind of retirement plan do you have at work? How much are you paying in administrative costs to contribute to it?

  • Heather Janis

    I just discovered that the 403b that my husband contributes to is a variable annuity. I am attempting to get myself educated. Do you know if all 403b’s are variable annuity or mutual funds? Thanks for your feedback. Also, should we transfer our funds already in the variable annuity for the past 7 year? What to transfer to??

  • http://www.erikfolgate.com erik.folgate

    Hey, thanks for the questions. I should not have been SO hard on the variable annuities. What you need to watch out for is their fees. There are usually a lot of fees that can shave about 1 – 2% off of your annual return. If the 403b offers some no-load mutual funds, then I would definitely go with that. Here is a great website that should help answer some more of your questions. 403b Wise Hope this helps you!

  • Michael Baker

    I’m hearing BIG things are about to take place at the end of this year (2010) by the IRS to go after (TAX) our contributions in 401k/403b and other tax deferred retirement plans.
    What can you tell me about this?
    M. Baker

  • joey

    hate the popups. 3X is 3 too many for the first 3 seconds on your site. goodbye forever