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RETIREMENT INSIGHTS

403(b) and 401(k) plans: Same goals, different paths

BlackRock |Aug 12, 2019

403(b) Report

2019 DC Pulse Survey

Our second report from the 2019 DC Pulse Survey finds that 403(b) and 401(k) plan sponsors and participants continue to diverge in surprising ways.

 


BlackRock’s 2019 DC Pulse 403(b) Report surveyed 78 non-profit plan sponsors with at least $300 million in assets, and 243 plan participants with at least $5,000 in their current employer plan.

403(b) plan sponsors feel more responsible for participants

403(b) plan sponsors feel more responsible about the overall financial well-being of their employees than their 401(k) counterparts. Almost all 403(b) plan sponsors (99%) agree that organizations should be responsible for the retirement preparedness of their employees, compared to 90% of 401(k) plan sponsors.
They are also more invested in helping employees after they retire.

403(b) plan sponsors take responsibility

Do 403(b) plan sponsors overestimate their plan’s effectiveness?

403(b) plan sponsors are highly engaged in getting their employees to and through retirement—but are they overly optimistic? Significantly more 403(b) plan sponsors say their employees are on track compared to their 401(k) counterparts. Yet 403(b) plan participants report a similar level of confidence to participants in 401(k) plans.

On track for retirement savings

Additionally, 403(b) plan sponsors may also be overly optimistic about their participants’ ability to navigate retirement, with 59% ‘extremely confident’ that their participants will know how much of their workplace savings balance can be spent each year in retirement, versus 32% of 401(k) plan sponsors.

403(b) participants: Less confident,
more disengaged

401(k) participants tend to be more knowledgeable about investments than their 403(b) peers, and are therefore more likely to engage with and make changes to their investments.

403(b) participants are more challenged with engagement:

403(b) participants are more challenged with engagement

403(b) plan sponsors recognize the opportunity to build confidence and engagement by offering tools and resources to participants. Fifty-five percent of 403(b) plan sponsors mention that they are satisfied with the tools and resources provided by investment managers, compared to just 9% of 401(k) plan sponsors.

Participant investing behavior: 403(b) vs. 401(k)

Unsurprisingly given their uncertainty, 403(b) participants are more likely to have a financial advisor help select their investments and prefer professional management of their investments.

They are also more likely to let their plans do more of the heavy lifting, while 401(k) participants make more of their own decisions.

Participant investing behavior: 403(b) vs. 401(k)

403(b) participants are also more likely to invest in an all-in-one fund like a target date fund, citing that they “don't want the responsibility of choosing their investments” as the #1 reason why. This reason is significantly higher than with 401(k) participants (39% vs. 28%).

403(b) plan sponsors taking
the lead on providing
income solutions

403(b) plan sponsors feel more responsibility for their participants after they retire, so it’s no surprise that they are taking the lead on retirement income tools and solutions.

Managing income in retirement

A significantly higher proportion of 403(b) Plan Sponsors have investments designed to help support participant spending needs once they retire (85% vs. 55%). Both 401(k) and 403(b) plan sponsors are primarily encouraging participants to use TDFs to manage income.

In addition, 90% of 403(b) plan sponsors are providing tools to help participants understand the amount of money they can withdraw from their savings in retirement, compared to 55% of 401(k) plan sponsors.

403(b) participants not ready to effectively spend in retirement

Despite these efforts, retirement income is still one of the most difficult challenges for an individual to manage. 403(b) participants, however, feel significantly less prepared than 401(k) participants – and nearly half haven’t given the challenge much thought.

403(b) participants are more likely to agree:

Spending effectively in retirement

403(b) plan sponsors are more engaged with plan design

Sixty-two percent review how participants’ investments are allocated to the various investment options more than once a year; significantly higher than 35% of 401(k) plan sponsors.

403(b) plan sponsors are also more confident in their abilities to optimize the plan:

Plan design

Almost half (46%) of 403(b) plans have conducted a plan design analysis, compared to 27% of 401(k) plans.

Learn how BlackRock can help plan sponsors and consultants with plan design analysis.

403(b) plan sponsors place importance on automatic features

403(b) plan sponsors value the potential for automatic features to reinforce the power of plan design, including:

Automatic features

Additionally, 97% of 403(b) plan sponsors agree that setting default contribution rates and escalation maximums too low can reduce the amount that participants would save otherwise, versus 85% of 401(k) plan sponsors.

403(b) plan sponsors value
active management

403(b) plan sponsors are stronger advocates of active strategies than their 401(k) peers:

Active investment management

ESG: More than just a
feel-good movement

403(b) participants are notably more interested in ESG investing. Compared to 401(k) participants, they are more likely to save for retirement if offered options that support environmental and social causes (41% vs. 34%).

Additionally, nearly three out of four 403(b) participants (72%) agree that companies focused on solving social challenges will perform better in the future, compared to 65% of 401(k) participants.

403(b) plan sponsors believe in the potential of ESG

It’s not just 403(b) participants that strongly support ESG solutions: plan sponsors are recognizing the desire for sustainable investing. Nearly nine in ten 403(b) plan sponsors are aware of ESG investing strategies, and over half are now offering ESG solutions to their participants.

ESG investing strategies

These offerings aren’t just to satisfy participants. Eighty-seven percent of 403(b) plan sponsors believe ESG-optimized investments lead to better risk and return profiles, compared to only 55% of 401(k) plan sponsors.