Participants in 403(b) plans tend to be more conservative and set aside less money than those in 401(k) plans, according to a new study.
Advisers trying to bolster their 403(b) business need to understand that employees in such plans exhibit different financial behaviors than 401(k) participants, said Gerald O'Connor, a director at Spectrem Group in Chicago, which conducted the survey.
Employees in 403(b) plans also receive less in matching contributions from their employers, the Spectrem study showed. Just 57% of 403(b) participants received employer match contributions compared with 74% of 401(k) participants.
In fact, employees enrolled in 403(b) plans were twice as likely as those in the 401(k) group to receive no employer contributions at all.
The Spectrem study, which involved surveying 205 participants in 401(k) plans and 196 participants in 403(b) plans online in May and June, found that 52% of 403(b) participants characterized their plan's investment strategy as "very" or "somewhat" conservative, versus 43% of 401(k) participants.
PARTICIPATION RATES
It also found that only 38% of workers employed by education and non-profit sector organizations contribute 6% or more of their salaries to their 403(b) retirement plan. That compared with 49% among private-sector 401(k) participants.
A 403(b) is a retirement plan sold to K-12 schools, universities, religious entities, health care providers and other not-for-profit organizations.
On Jan. 1, non-profit groups that offer 403(b) plans will be required to meet new guidelines issued by the Department of the Treasury and the Internal Revenue Service.
Essentially, those guidelines will make
403(b) plans more like 401(k) plans by requiring sponsors to maintain written plan documents.
With many advisers angling for new 403(b) business this fall as non-profit groups make changes to their existing plans, it's important that they realize that non-profit employees approach their retirement savings differently than 401(k) employees, Mr. O'Connor said.
"Employees in 403(b) tend to be more conservative," he said. "If you're setting up a plan with an organization, you need to be sensitive to the funds you pick and the way you educate people."
Participation in 403(b) plans also lags because many 403(b) participants receive a traditional pension from their employer, said Chris DeGrassi, an assistant vice president and director with Topeka, Kan.-based Security Benefit Corp., which manages about $12 billion in 403(b) assets.
"They're already having money taken out of their paycheck for their pension," he said. "This 403(b) plan is above and beyond the pension plan. There's a difference in motivation there."
NO MATCH
The fact that fewer non-profits offer to equal contributions presents another obstacle to higher participation, because employees have no incentive to contribute a maximum matchable amount, he said.
"It's very easy to say that you don't want to leave 5% sitting on the table and to at least contribute the minimum," Mr. DeGrassi said. "You don't have that motivation on the 403(b) side."
Ian McLeod, an investment adviser with The Social Equity Group Inc. in Berkeley, Calif., which manages $70 million in assets, disagreed with the premise that 403(b) participants differ significantly from their counterparts in 401(k) plans.
"My experience with young non-profit professionals is that they're really smart and committed to what they're doing," he said. "And that's why they're in the non-profit world, but they also know nothing about retirement and finances."
E-mail Lisa Shidler at lshidler@investmentnews.com.
