Yet another of the Small Business Job Protection Act signed into law by President Clinton in August 1996 allows nonprofits of all types to establish 401(k) retirement plans as of January 1, 1997. Before that time, no tax-exempt organizations were allowed to establish new 401(k) plans and some nonprofits (trade associations and advocacy groups, in particular) were excluded from establishing either 403(b) or 401(k) plans. The legislation was passed so these organizations could provide a pre-tax savings mechanism for their employees.
You may receive a lot of mail and phone calls from vendors offering 401(k) products and you may be considering a 401(k) as a retirement vehicle for your organization. A couple of points to consider: If you have a 403(b) plan in place now you can suspend your 403(b) contributions to start a 401(k) plan. However, 403(b) plans cannot be terminated until the last participant withdraws the last dollar out of the plan. While you cannot combine the funds of the two plans you may add a 401(k) plan as an option for your employees or you may choose to offer the 401(k) plan as the retirement option for your employees instead of an existing 403(b). In all cases, though, separate records for the account balances in each plan must be maintained and you may incur administrative costs for each.
Investment options vary slightly between 401(k) and 403(b) plans. Both 403(b) and 401(k) plans offer mutual funds and variable annuities, but 401(k)s can allow investment in individual stock. Keep in mind that basic "pre-packaged" retirement plans, whether 401(k) or 403(b) are less expensive than custom designed programs and in general, 401(k) plans are more expensive to establish and maintain than 403(b) plans. It's possible, though, that over time the difference in cost will even out.
If you are interested in a more comprehensive analysis of the similarities and differences between 403(b) and 401(k) plans, Lisa Benjamin at Charles W. Cammack Associates, Inc. has prepared a worksheet on the topic. Call her at 212/227-7770 for a copy.
Copyright 1998 Nonprofit Coordinating Committee of New York.