401(k) vs. 403(b): Different Paths to Retirement Readiness

Studies find differences in 403(b) and 401(k) plan design and participant behavior, but both plan types are increasing in importance for employees.

For-profit and not-for-profit organizations have myriad differences, from the size of their budgets to the cultures within their offices.

When it comes to offering retirement plan benefits, however, both types of plan sponsors share the goal of wanting to improve the retirement readiness of their participant populations. Nearly all (99%) executives say they’re committed to employee retirement savings, with 29% saying they are very committed to that goal, according to a March report from PNC Institutional Asset Management.

While there are regulatory differences between 401(k) and 403(b) plans, there are also differences in plan sponsors’ retirement and financial benefit offerings. Some of those differences reflect long-term trends stemming from the genesis of each type of plan, while others may have more to do with the resources that each has available to invest in their plan.

Here’s a look at certain differences between 401(k) and 403(b) plans. One important caveat to note: Not all 403(b) plans are compliant with Employee Retirement Income Security Act regulations. That makes it much more difficult to gather data or get a full picture of 403(b) plans, since they’re not required to file Form 5500s with the Department of Labor.

For-Profit Plans Are More Likely to Offer a Match on Employee Deferrals 

The PNC report found that for-profit companies are slightly more likely to make contributions to their employee retirement plans (93%) than are nonprofit organizations (79%). In both types of plans, the larger the plan, the more likely the plan sponsor was to offer a match on employee deferrals.

That lower contribution rate on the 403(b) side could reflect several factors, says Tim Rouse, executive director of the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute, a trade association for the retirement plan industry. One such factor is that, by their nature, for-profit organizations may have larger budgets with which they can make such contributions.

Another reason is that many 403(b) plan sponsors also offer other retirement benefits to their participants, such as pension plans. “In that case, the pension plan is where the employer is making the retirement contributions,” Rouse explains. “And the 403(b) is just a supplemental savings vehicle, whereas in the 401(k) world, that is the sole retirement plan for the participant.”

Indeed, about 60% of 403(b) participants said that it was their only retirement plan, compared to 80% of 401(k) plan participants who said the same.

403(b)s Tend to Have a Larger Investment Menu Than 401(k)s

An April analysis by the Government Accountability Office found that ERISA-regulated 403(b) plans have an average of 32 investment options, compared to an average of 21 in 401(k) plans.

One reason that 403(b) plans may have more investment options, Rouse says, is that many 403(b) plans began as non-ERISA plans, which typically facilitate individual contracts between providers and participants, rather than group contracts between the plan sponsor and the provider. “So you still have a lot of individual contracts and multiple vendors in the 403(b) world,” Rouse says. “You just don’t see that in the 401(k) world.”

As more 403(b) plan sponsors take on a larger fiduciary responsibility, they’re shedding vendors over time and offering a more streamlined investment menu, according to Rouse.

The offerings within 401(k) and 403(b) plan menus differ as well. Many 401(k) plans have begun offering lower-cost collective investment trusts in recent years, an option that’s not currently available under law to 403(b) plans, which can only offer mutual funds and annuities.

For-Profit Plan Participants Are More Likely to Have Outstanding Loans

The 2021 PLANSPONSOR Defined Contribution Survey found that just 7.3% of participants in 403(b) plans had an outstanding plan loan at the time of the survey, compared to 12.4% of participants in all plans. One factor in lower loan usage may be plan design, since more than half of 403(b) plans restrict participants to having no more than one outstanding loan at a time from their plan, Rouse says.

In this instance, 403(b) plans may have an edge over 401(k) plans when it comes to retirement readiness. Defaulting on a plan loan can result in $300,000 in lost retirement security over the course of a participant’s career, according to an analysis by Deloitte.

Nonprofit Plan Sponsors Are Less Likely to Offer Financial Wellness Education

Six in 10 for-profit companies offer financial education to employees, compared to just over half of nonprofits, according to PNC. That said, among those that do not currently offer financial wellness to employees, 36% of nonprofit plan sponsors say they’re planning to do so, while 22% of for-profit plan sponsors said the same.

“I think employers are stepping up because they realize that with a more remote workforce, they need to do more to get people engaged with the retirement plan,” says Alistair Jessiman, head of PNC Institutional Asset Management.

Participation rates in financial wellness programs at 403(b) plans also tend to be lower than participation rates at 401(k) plans, the PNC research found.

“The numbers are still not as good on the outcomes if people aren’t participating in the education part,” Jessiman says. “There’s a high correlation between the education and participants taking advantage of things like getting the match and other tools designed to help them.”

Use of Automatic Enrollment in 403(b)s Lags Use in 401(k)s

The percentage of 403(b) plans implementing auto-enrollment features is inching up, rising to 42% in 2021 from 37% in 2017, according to the PLANSPONSOR Defined Contribution Survey. But that rate remains far below the 60% of 401(k) plans that use auto-enrollment, according to the DCIIA Retirement Research Center.

Wendy Davis, vice president of retirement strategy, non-profits at Transamerica, says she encourages 403(b) plan clients to follow the example of their for-profit peers in this case, citing auto-enrollment and its cousin, auto-escalation, as best practices for all retirement plans to consider if they want to boost participation rates.

“Our data show that most employees do not opt out, even when their default deferral and escalation rates are fairly aggressive,” she says. “Even so, if an employee opts out of auto-enrollment, they are reminded each year about the benefits of joining the plan.”

Another reason for lower use of auto enrollment in 403(b) plans is that many states limit the ability to automatically deduct money from employees’ paychecks.

Number of 403(b) Plans Downs, Number of 401(k)s Growing

The total number of ERISA 403(b) plans has inched downward, falling to 20,900 plans in 2020 from 21,900 a decade earlier. By contrast, the number of 401(k) plans has continued to grow, to 595,000 from 510,000 over the same period, according to a GAO report.

One factor contributing to there being fewer 403(b) plans, according to the GAO, is the significant merger and acquisition activity in recent years that has occurred in the health care sector, which employs a large share of 403(b) plan participants. Health care industry 403(b) plans represented the most quickly shrinking sector, with the number of 403(b) plans at health care organizations falling by 10.4%, even while the total number of assets in that sector grew by 140%.


Despite all these differences, the gap between savings in 403(b) plans and 401(k) plans is shrinking. In the third quarter of 2021, 403(b) savers had an average account balance of $110,800, according to Fidelity, about 88% of the average 401(k) balance of $126,100. That’s more than double the amount that 403(b) savers had in their account in the third quarter of 2011, when they had saved an average of $50,100, or just 78% of the average 401(k) investor.

That might reflect a growing reliance among some nonprofit workers on their 403(b) plan as a more primary means of saving for retirement.

“Even for teachers and others in the not-for-profit world, the days of healthy, traditional, employer-paid pensions plans are dwindling,” Davis says. “Generous pensions plans were one of the biggest rewards of working in the not-for-profit sector, but today everyone needs a retirement strategy, regardless of the sector in which they work.”