There seems to be an ongoing debate about which is better to contribute to, a 401(k) or a 403(b)? Typically, from a retirement standpoint both vehicles are very similar in that they are both employer sponsored plans. Both are also qualified tax-advantaged retirement vehicles.
But there are some differences between the two plans:
- 401(k) plans are offered by private, for-profit companies; 403(b) plans are only available to nonprofit organization and government employers.
- Employers that offer a 401(k) plan may match or make contributions to the plan on behalf of an eligible employee. In some cases profit-sharing is also a feature that can be added to the 401(k) plan. 403(b) plans are legally able to provide employer matches to plan participants, but most employers don’t offer a match due to potential ERISA exemption issues.
- 401(k) plans tend to be administered by mutual fund companies; 403(b) plans tend to be administered by insurance companies. Because of this, you will find 403(b) plan investment options are mainly annuities while 401(k) plan investment options offer a great deal of mutual funds.
Those are the major differences between a 401(k) and a 403(b). So which is right for you? It depends on if you are employed by a nonprofit organization or a for-profit company. In either case, my advice is to put some money away for retirement. If your company offers some type of match, by all means take advantage of that match. If you are with a company that doesn’t offer a 401(k) or 403(b) plan, then you have to take an additional step and begin a retirement account outside of your employer. My suggestion is to start a Roth IRA.