You mean the difference between a 401(k) and 403(b). They are essentially the same, except the 401(k) is used by profit oriented companies as a vehicle for its employee's retirement funds. The 403(b) serves the same function for employees of not-for-profit organizations such as colleges, hospitals, and charitable foundations. Both funds make up what are called defined contribution retirement plans. That is, the contribution into the plan by employees is defined, and the amount of retirement income is determined by the amount to which the fund has grown by the time the employee retires. This is in contrast to defined benefit retirement plans in which the employer (and sometimes also the employee) contributes into a fund and the amount of retirement income (the benefit) is determined by a formula that takes into account the number of years worked, the earnings of the last few years before retirement, and the age of the retiree.
In both cases of 401(k) and 403(b), the employees contribute part of their salary into the fund, and the money contributed is not taxed until the employees draw it out during retirement. In both cases the employer may contribute matching amounts, which is an inducement to the employee to make a contribution. The amount of matching funds varies according to the employers' policies.
401(k) and 403(b) funds usually give employees the opportunity to choose among several types of investments. Some employees prefer safety and invest in bond funds or stock income funds; others may assume more risk and invest in stock growth funds. Their retirement income depends on how well the fund did with the investment employees chose.
One of the biggest 403(b) plans is TIAA-CREF, which invests teachers' and professors' retirement money. They operate a number of different funds, including foreign stocks, growth stocks, bonds, and real estate. Employees can choose a combination to spread their investments over these alternatives.
· 1 decade ago