403(b) vs 401(k): Which is the Best Retirement Plan for Your Non-Profit, Church, or School?

Offering a retirement plan like a 401(k) or 403(b) is a key need for most non-profits, churches, and education institutions. These benefit packages provide tax advantages, support long-term financial wellness for your team, and can help attract and retain valuable employees. Most school, church, and non-profit retirement plans are defined contribution plans, where both employer and employee can contribute regularly to a retirement account — and understanding the differences between a 401(k) vs 403(b) can help you choose the right plan for your organization. Note that while schools, churches, and non-profits may choose which is best suited for their organization, the 403(b) is not an option for other businesses.

What is a 401(k)?

A 401(k) is the most common retirement plan for businesses and is also an option for non-profits, churches, and schools. These plans allow both employers and employees to contribute and save tax-deferred and/or after-tax with the Roth 401(k) feature. 401(k) plans are a popular retirement plan for businesses and employees because they offer flexibility, automatic payroll contributions, high contribution limits, and tax benefits.

Key Features:

• Employer and employee contributions through payroll deductions
• Tax-deferred growth, with an option for Roth (after-tax) contributions
• Higher contribution limits than traditional IRAs
• Access to a wide range of investment options
• Must comply with ERISA Rules, which include fiduciary responsibility, annual reporting and nondiscrimination testing

What is a 403(b)?

A 403(b) was the original retirement plan designed for nonprofit organizations such as schools, churches, and 501(c)(3) charities. It functions similarly to a 401(k), with automatic payroll contributions, tax-deferred or Roth (after-tax) savings, and contribution limits set by the IRS.

Key Features

• Available to nonprofits such as schools, tax-exempt hospitals, religious groups, and charitable organizations
• Employer and employee contributions through payroll deductions
• Tax-deferred growth, with some plans offering a Roth option
• Similar contribution limits to 401(k)s
• Investment options that typically include mutual funds and annuities
• May be exempt from ERISA rules, reducing administrative requirements

401(k) vs 403(b): Key Differences

The biggest difference between 401(k)s and 403(b)s is who can offer them to their employees. A 401(k) is available for private, for-profit businesses as well as non-profits, while a 403(b) is only available to nonprofit and tax-exempt organizations.

Other Key Differences Include:

Investment choices – 401(k) plans typically offer a broad selection of investments including exchange traded funds, mutual funds, model portfolios, target-date funds, and more. In contrast, 403(b) plans often limit investments to annuity contracts and a few mutual funds.

Administrative requirements: 401(k) plans must follow ERISA rules, while many 403(b) plans – especially those for public schools and churches – may be exempt, which can make them easier to manage. However, adopting a Safe Harbor 401(k) design will ensure there are few/any additional administrative needs to meet ERISA rules.

Special catch-up contribution provision: 403(b)s allow for additional catch-up contributions for employees who have 15 or more years of tenure, which is not available in 401(k)s until the employee is 50 years of age.

401(k) vs 403(b): Pros and Cons for Nonprofit Businesses

401(k) Pros:

More investment choices: 401(k) plans often include ETFs, mutual funds, and target-date funds—lower-cost options compared to the annuities commonly found in 403(b) plans. They also offer broader exposure to a variety of asset classes, which may better align with employees’ investment goals. Note that annuities can be made available in a 401(k) but have been unpopular due to costs and the added complexity of annuity contracts.

• Payroll: Easy integration with most payroll providers.
• Higher contribution limits: Compared to traditional IRAs and other options.
• Tax savings: Tax-deferred growth, with some plans offering a Roth option.
• Eligibility for profit-sharing and/or employer nonelective contributions: Some plans allow for profit-sharing contributions and/or other nonelective contributions from the employer.

401(k) Cons:

• More strict compliance rules due to ERISA.
• No universal catch-up rule: However, catch-up contributions of $7,500 per year are available for those over 50 ($11,250 for those 60-63).

403(b) Pros:

• Additional catch-up provision: Employees with 15+ years of service with a qualifying employer may be able to make extra catch-up contributions (up to $3,000/year, lifetime max of $15,000).
• Less administrative requirements: Exempt from some ERISA regulations, which can simplify plan operation.
• Similar to a 401(k), 403(b)s have higher contribution limits vs other retirement options.
• Tax-deferred growth, with some plans offering a Roth option.

403(b) Cons:

• Limited investment options: Most 403(b) plans primarily offer annuities or a narrow range of funds, which tend to have higher fees, and less flexibility compared to the broader, often lower-cost options available in 401(k) plans. While annuities can provide guaranteed income in retirement, their higher costs and rigid contracts make them less ideal for building retirement savings.
• Annuities are contractual arrangements and can add complexity for participants and your organization if you switch providers.

Which Retirement Plan Should Your Non-Profit Business Offer: 401(k) or 403(b)?

If your organization is a nonprofit, choosing between a 401(k) and a 403(b) requires careful consideration of what matters most to your organization in determining the best fit. Here is a quick breakdown:

A 401(k) may be a better option when:

• A broader range of investment options and asset categories is desired.
• Lower-expense investment options: Lower expense funds historically have outperformed higher expense funds over time. Future returns of course cannot be guaranteed.
• Features like employer matching, non-elective profit-sharing, or scalable plan design are important.
• Seamless payroll integration and competitive employee benefits are a priority.
• Potential for lower overall costs due to more competition in the 401(k) marketplace vs. 403(b)s.

A 403(b) is often a good fit when:

• There is a preference for a simpler plan structure with fewer ERISA administrative requirements.
• Limited investment options are acceptable, often focused on annuities and/or mutual funds.
• There is no immediate need for additional features or investment options.

Both 401(k) and 403(b) plans are excellent tools to help employees save for the future while offering valuable tax advantages. The best choice often depends on the level of flexibility or simplicity your organization needs, as well as the investment options that will best support your team’s retirement goals. For some, a straightforward 403(b) may be a solid fit. For others, a more customizable 401(k) offers greater growth potential and broader investment choices. Either way, providing a retirement plan is a meaningful step toward supporting your employees and strengthening your benefits package.

Key Takeaways: 401(k) vs 403(b)

Here is a quick recap of the most important points to keep in mind:

• A 401(k) can be offered by both for-profit businesses and nonprofits.
• A 403(b) is designed for nonprofits like schools, churches, and tax-exempt groups.
• Both plans can offer tax-deferred or Roth options, automatic payroll contributions, and high annual contribution limits.
• 401(k)s usually offer more investment flexibility with ETFs, mutual funds, and target-date funds that are not typical in 403(b)s.
• 403(b) plans may have more limited investments, often focused on annuities and a small list of mutual funds.
• Annuities are common in 403(b) plans. However, they often come with higher fees, which can limit growth, though they may offer more stable value compared to ETFs and mutual funds.
• 403(b) plans may come with simpler administration and fewer compliance requirements.
• 401(k)s must follow ERISA rules, including annual reporting and nondiscrimination testing. Safe Harbor design does automatically satisfy testing requirements.
• Both plans allow employees age 50+ to make catch-up contributions.
• 403(b) plans also offer a special provision for employees with 15+ years of service (allowing for additional contributions up to a lifetime maximum).
• 401(k) plans may offer more room for customization and added features to meet your organization's needs.

The Bottom Line:

Both 401(k) and 403(b) plans offer powerful tools to support employee retirement savings, but the best option depends on the organization’s structure and goals. For nonprofits seeking a simpler, lower-maintenance option, a 403(b) may be a good fit. For organizations that are prioritizing greater flexibility, investment variety, lower investment expense, and additional features, a 401(k) may be a better solution. In either case, offering a retirement plan is more than a benefit – it is an investment in employees, their future, and the overall strength of the organization.