Just a few short years ago, the term “401k” held very little meaning to me. All I knew was that it was something boring adults had, and since I refused to become one of those, I needn’t think of such nonsense. This mentality lasted until Johnny and I moved to New York City, and Johnny got his first job at a company that offered a 401k match. His company matched 50% up to 6%, so he began contributing 6%.
And then one night soon after, he asked me whether my company matched 401k’s. I’d been with my company for a couple years working remotely, and I vaguely remembered hearing a speech about retirement options at my new employee orientation. As a very recent college grad at the time, I had immediately tuned out such an irrelevant topic and let all the drab adults in the room take note. But Johnny’s question had me wondering, so after a little digging in my employee portal, I discovered that my company offered a 3% 403b match. I had never heard the term 403b, but it sounded like some sort of cheap knockoff of 401k — the Shasta soda of the financial world. But I did some reading and discovered some useful facts about both.
Who Offers Them
401k’s are offered by for-profit companies. 403b’s are offered by nonprofit companies and government institutions. You as the employee have only the option of what your company offers. My company, because it is a nonprofit, offers a 403b, so that’s what I can invest in.
The investment choices with a 403b are limited to mutual funds and annuities, while 401k’s offer more choices, depending on your employer. This could be seen as a downside to 403b’s. However, I currently have my 403b money invested in a mutual fund, and although Johnny may have more choices with his 401k, his money is also invested in a mutual fund. In other words, even if I had a 401k, my money would probably be in a mutual fund, so I don’t feel limited by the 403b.
Whether a 401k or 403b is matched by the employer is completely up to the employer. Some companies match 50% and others match 100% up to a certain percentage. My company automatically contributes 3% of my salary to a 403b without me contributing anything. However, if I contribute 3%, they will match an additional 3% of my income at 100%. Trust me, I’ve mentally kicked myself in the butt several times for not taking advantage of that free money for a full two years! Ugh. All because I didn’t want to become boring.
Oftentimes if a company matches its employees’ 401k or 403b contributions, the employees will have to wait a number of years before they are fully vested. For instance, I am 100% vested with my company after 4 years. If I quit before that time, I will not collect all of my company’s 403b contributions. After the first year, I only get 25% of my company’s contributions. After 2 years, only 50%, and so on. However, whatever money I contribute myself is 100% vested from day one.
So, no, 403b is not the generic, less tasty version of 401k. Its name is just not as well known. Essentially, they are very similar, but the kinds of companies that offer them are different. It’s kind of like how there’s Quickbooks for us regular folks to use and Quickbooks Online Accountant Edition for bookkeepers. Also, I think after writing this post, I’ve become a full-blown boring adult. But I just checked the ever-growing balance of my 403b account yesterday, and if free money makes me a dull, old lady, then there’s no one else I’d rather be.
If your company offers 401k or 403b, how much are you contributing? Did you fall asleep reading about them? Bueller? Bueller?