403(b) vs. 401(k): Retirement Picture Varies

People often fall into a trap when they look at their 401(k) retirement savings account balances. They see a (hopefully large) bucket of money and start planning indulgences for their golden years, without having a sense of the expenses inherent in those golden years.

In contrast, near-pensioners who work for nonprofits often participate in 403(b) plans. Statements from these accounts feature projected monthly disbursement figures, not the big number.

“In a 401(k), you think of accumulation balances,” said Tim Walsh, managing director of investment services at TIAA-CREF. “The 403(b) plans were created to provide reliable monthly retirement income.”

Monthly distributions vary, as they are a function of a given plan’s investment. And retirees are also able to supplement their monthly income with Social Security payments. Even so, the distributions spun off by $40,464 — the median amount held in 403(b) plans, according to the 2014 403(b) Plan Survey from the Plan Sponsor Council of America (PSCA) — might not be enough to cover a retiree’s expenses. The average figure, which might be skewed by a comparatively few large balances, is $54,600, according to the PSCA.

That $40,464 figure offers just a snapshot, as contributions from workers range considerably. Total balances vary by industry segment, ranging from $102,578 for associations to $29,518 for social and community service organizations, the PSCA’s survey found.

Compare that $54,600 to the average $91,300 reported by Fidelity Investments as the average balance in a 401(k) plan. It’s a jump of more than 30 percent from 2011’s average balance of $69,100. That $54,600 might also be impacted on the low side by the fact nonprofits started offering 401(k) plans in 1996. It is possible a plan holder stopped funding the 403(b) and moved into the more popular 401(k) type account.

Financial planners define an acceptable retirement income as between 70 and 80 percent of pre-retirement annual earnings. Reaching this level requires a mix of factors: long-term contribution history; rebalancing investment options to reflect age-appropriate risk; and resisting the temptation of early withdrawal.

The outlook regarding whether retirees will be heading to the soup lines they previously staffed is largely based on their current age. Baby Boomers — born between 1946 and 1964 — are most likely to meet, or have met, retirement needs. But nearly half don’t have enough of their investments in stocks, thereby inhibiting their accounts’ growth potential. A similar number of participants aren’t consistently contributing the recommended 15 percent, according to the Fidelity Investments Retirement Savings Assessment.

Baby Boomers who fear falling short have a number of options available to them. Nearly 95 percent of all plans allow catch-up contributions for participants age 50 and older, according to the PSCA’s survey.

Members of Generation X (those born between 1965 and 1977, per Fidelity) face similar criticism, and Fidelity further recommends that many delay retirement or tapping the account until age 70. Generation Y workers (those born between 1978 and 1988) face additional headwinds: They tend to couple low savings rates with surprisingly conservative investment strategies, a cautionary bent perhaps reflecting entering the workforce during the 2008-2009 downturn. Furthermore, people in this group are least likely to have pensions as an employment benefit. They also have unrealistic expectations about retiring at age 64, meaning they won’t receive maximum Social Security benefits.

The U.S. government has encouraged retirement savings by passing legislation making lifecycle, or target-date, funds a safe harbor for employers. That means employers can’t be held responsible if, upon reaching the target date, a specific plan has lost money. Of nonprofit employers, 75 percent of them offer target-date plans, according to the PSCA survey.

As a result, fund managers at organizations where automatic enrollment is used are pushing into these plans the funds of employees who don’t make their own allotment picks. Employees benefit, said TIAA-CREF’s Walsh, because lifecycle funds are professionally managed, take age-based considerations into account, and are periodically rebalanced to move assets from equity investments to fixed-income investments appropriate for retirees.

Despite the increasing embrace of automatic enrollment (16 percent of all nonprofits provide this feature, according to the PSCA survey), employee savings rates still vary between nonprofit sectors, said David Martin, vice president of client analytics and industry research in the Tax Exempt Retirement Services unit at Fidelity Investments. Workers in the healthcare sector have savings rates of around 10 percent — and that includes employer contributions. Those in higher education fare better, with contribution rates reaching 13 percent.

Salaries within nonprofits might be lower than in the commercial arena, meaning that a 10 percent annual contribution won’t add up as quickly. That said, many nonprofits have lower turnover rates. As a result, there are fewer opportunities for an employee to be tempted to liquidate a retirement savings plan prematurely, rather than roll it over. The exception to this, according to Fidelity’s Martin, is in the healthcare segment, where turnover is “significant.”

A proprietary salary and benefits survey of nearly 900 nonprofits by The NonProfit Times and Bluewater Nonprofit Solutions illustrated other sector-based differences. For instance, education-based organizations (higher and otherwise) offered 403(b) plans more frequently (43 percent) than any other type of organization. Nearly 66 percent of employees in the education field took advantage of these plans, the survey found. While many higher education institutions have mandatory plan enrollment, they are the exception. “The tax-exempt market is a little behind the modernization that corporate 401(k) plans have undertaken in the last five or more years,” Martin said.

The good news is that other nonprofit sectors, such as healthcare, are increasingly embracing automatic enrollment. Organizations that offer it see average employee enrollment rates of 85 percent, Martin added.

That would be a step up from current employee participation rates. Today, when 403(b) plans are offered by an organization, just fewer than 65 percent of employees participate in them, according to The NonProfit Times/Bluewater survey. The figure is even lower – just under 12 percent — for enrollment in 457 plans, which are primarily available to government workers.

How do workers themselves feel about their retirement prospects? There are no studies that do head-to-head comparisons of retirement readiness between employees in the nonprofit and for-profit sectors. But in 2011 two unrelated surveys offered some insights. That year, only 49 percent of all working-age and retired Americans were either “very” or “somewhat” confident they would have enough money to live comfortably in retirement, according to the Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey.

By comparison, 55 percent of nonprofit workers surveyed by TIAA-CREF for its 2011 Survey on Financial Security in the Nonprofit and Philanthropic Sector — the most recent study conducted — said they were “extremely,” “very,” or “somewhat” satisfied with their ability to prepare financially for retirement.

Granted, those surveys used different methodologies: The TIAA-CREF study offered respondents five choices, while EBRI’s used a four-point scale. But if attitudes within these two groups shift similarly, there’s hope for nonprofit workers in EBRI’s most recent study of all workers: As of 2014, 55 percent of the total workforce was either very or somewhat confident about having enough money for a comfortable retirement.
Richard H. Levey is a New York City-based business writer and frequent contributor to The NonProfit Times.