“403(b)s are not 401(k)s, and damage is done by not understanding the difference,” PenServ Plan Services President Sue Diehl emphasized at the outset of a session dedicated to a comparison of the two at the ERISA 403(b) Advisor Conference in Washington, D.C. on Oct. 2.
She then listed several differences and when one should be used over the other.
“With elective deferrals, a 401(k) must do ADP and ACP testing,” Diehl said. “It’s easier with a 403(b); you just have to send a notice. Top heavy testing does not apply to 403(b)s, and there is also no penalty for late deferrals with a 403(b) and no Form 5330 filing requirement. About the only area in which 401(k)s win out is with setting the eligibility for elective deferrals.”
She also noted administrative costs are about the same for both and that 403(b)s are not more expensive despite “numerous articles” she’s seen claiming the opposite.
Moderator Nathan Glassey, Executive Director of the National Tax-Deferred Savings Association (NTSA), asked Bolton Investment’s Mike Beczkowski about areas of litigation aside from fees.
“Documentation of the investment selection process, especially with target-date funds, is a major area of legal exposure,” he answered. “Also, participants who don’t have enough money saved for retirement. There will be lawyers with billboards telling participants to call them if they don’t have enough saved. It’s coming. There has to be documentation from employers that a plan was offered and communicated to the employees and that they didn’t take full advantage. The burden will always fall to the plan sponsor to document all of this.”
Lastly, Glassey asked CAPTRUST’s Mike Webb about particular 403(b) market segments that might be more accessible to an advisor new to the space.
“You can become a 403(b) expert pretty quickly,” Webb said, noting that he’s worked with them since 1991. “There’s an opportunity with smaller plans, like small private schools, museums, and foundations. There is a lot of competition on the 401(k) side but not as much on the 403(b) side. I see a lot of people just starting out who do very well. The entry point for 403(b)s is much easier.”
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