The average employer contribution to a 403(b) account in 2020 was 4.1% and an average amount of $3,000. What’s odd is that other sources report that the majority of non-profit organizations did not increase their contribution levels during the pandemic.
The norm for most 403(b) Plan Sponsors is questions. A lot of questions. But there may be more confusion than usual among participants with a new load of mixed messages on the Internet. Given how well participants in 403(b) plans did over the last 18 months (in terms of savings and enrollment), Plan Sponsors may want to get ready for some common queries. Here’s a review of what we’ve seen on the Internet that may need clearing up for your participants.
First, Plan Sponsors always face hurdles in explaining how a 403(b) compares to a 401(k). But this confusion seems to have gotten deeper as advice now appearing on the web conflicts in terms of whether a participant can enroll in both types of plans. Because of the difference in how withdrawals are treated at separation, some employees may want to enroll in both plans. Additionally, the additional catch-up provision in a 403(b) of $3000 after 15 years of service may be attractive to some employees, though hard to calculate. Additionally, as noted above, there is conflicting information that is publicly available as to the availability of catch-up contributions for those participating in both a 401(k) and a 403(b) plan. This conflicting information in the public sphere may raise questions from participants. Finally, an employee cannot participate in both a simple 401(k) plan and a 403(b) plan, which may also cause confusion among participants as to whether they can participate in other 401(k)s and 403(b)s at the same time.
Second, the attention on 403(b) Plans may be here for a while. The average 403(b) account increased by 42% during 2020. According to Investopedia, the average employer contribution to a 403(b) account in 2020 was 4.1% and an average amount of $3,000. Compared to 401(k)s, with a similar average of 4.6% but much lower amount of $1,720,[1] 403(b)s may stand out in terms of employee attention. What’s odd is that other sources report that the majority of non-profit organizations did not increase their contribution levels during the pandemic.[2] This conflict in information could raise questions among employees. Some participants may not understand the difference in who received additional contributions or that 403(b) plans do not have the same scrutiny regarding nondiscrimination as other plans.
Third, additional options may be increasing in favor. Just as Roth 401(k)s are gaining attention among employees, so too are Roth 403(b)s. The increase in the number of enrollments in these funds jumped 10% in the mid-2010s, and seems to be continuing to increase. What is confusing also is whether the catch-up contributions are permitted for Roth 403(b)s or 403(b) plans, or both.
Fourth, the motivation in providing a retirement plan seems to differ between 401(k) sponsors and 403(b) sponsors. 401(k) sponsors are much more likely to use a 401(k) as a recruitment and retention plan, whereas 403(b) sponsors are more likely to offer a plan to ensure employees have sufficient funds in retirement. Similarly, 403(b) sponsors are more likely to look to retirement readiness as a metric of success than their 401(k) counterparts who count participation and contribution rates as success goals.
Health care companies may face even more questions than other non-profits eligible to offer 403(b) plans because health care recruiters note that retirement planning is a higher need among those they recruit. Additionally, some hospitals and non-profits with highly paid directors may want to use a 403(b) option rather than a 401(k) option due to the difference in nondiscrimination testing. But what triggers that testing is somewhat complicated and should be reviewed with an advisor.
[1] https://www.investopedia.com/americans-retirement-savings-show-remarkable-resilience-despite-pandemic-effects-5186434
[2] https://www.principal.com/es/informaci%C3%B3n-sobre-nosotros/prensa/noticias-recientes/new-403b-survey-finds-most-organizations-staying-course-retirement-plans-despite-covid-19
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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