The Hidden Vendor Cut in 403(b) vs 401(k) Plans

A 403(b) and a 401(k) share a $24,500 employee cap in 2026, but teachers still buy from a different store. The Internal Revenue Service applies the same elective deferral limit to both plans, along with the same age-50 extra and the same ages-60-to-63 extra.

Insurance companies still fill many school menus with annuity contracts. Federal securities law still blocks 403(b) accounts from the cheap collective trusts that 401(k) plans already use.

Teachers Get the Same IRS Limit and a Different Store

You do not pick 403(b) vs 401(k) the way you pick Roth or traditional. Your employer’s legal status picks it. A 401(k) is the private-sector plan. A 403(b) is the plan for public schools, colleges, hospitals, churches, and 501(c)(3) charities.

The IRS still files 403(b) plans under their original name, a tax-sheltered annuity or TSA plan. That label is the tell. The account can hold an insurance annuity contract, a custodial account invested in mutual funds, or a church retirement income account. It cannot be funded with life insurance issued after September 24, 2007.

Sen. Katie Britt, who is carrying a bill to widen 403(b) menus, puts the worker count at 14.5 million American nurses, teachers, ministers, and charity staff. Those people share a tax code with 401(k) savers. They do not share the same store.

2026 Contribution Limits Apply to Both Plans

On November 13, 2025, the IRS said in IR-2025-111 that the 401(k) and 403(b) limit of $24,500 applies for 2026, up from $23,500. The age-50 catch-up rose to $8,000 from $7,500. The higher catch-up for people who turn 60, 61, 62, or 63 stays at $11,250.

Add those pieces and a saver age 50 to 59, or 64 and older, can defer $32,500. A saver in the four-year 60-to-63 window can defer $35,750 if the plan allows that extra. Combined employee and employer additions are capped at $72,000, or 100% of includible pay, whichever is less.

2026 EMPLOYEE AND EMPLOYER CAPS

Starting in 2026, SECURE 2.0 also changes the tax color of catch-up money for higher earners. If 2025 FICA wages from the employer that sponsors the plan were above $150,000, any catch-up has to go in as Roth. The $24,500 base can still be pre-tax. If the plan has no Roth account at all, those workers lose the catch-up.

The Annuity Sales Channel in K-12 Plans

Large hospital and university 403(b) plans now look a lot like 401(k)s. The leftover problem sits in K-12 districts and smaller nonprofits that still post a multi-vendor list and let insurance agents work the teachers’ lounge.

Those lists often lead with fixed and variable annuity contracts. Inside a tax-deferred account, the extra tax wrapper is redundant. What is not redundant is the bill: mortality and expense charges, rider fees, wrap fees, and surrender schedules that can lock money for years. A high-fee individual annuity sold that way would be a fiduciary problem in a typical 401(k). Many public-school 403(b)s are built so that test never applies.

Some of the public argument around this treats cheaper 403(b) funds as another break for churches and nonprofits. That misses the mechanics. Opening the menu would not raise the IRS cap. It would stop a sales channel from charging 401(k) prices plus an insurance spread for the same deferral.

COSTS TO READ IN THE CONTRACT

• Fund expense ratio: The yearly drag on each option, which is where most of the damage compounds.
• Mortality and expense fee: An insurance charge layered on variable annuity subaccounts, on top of the fund’s own cost.
• Surrender charge: A penalty for moving money before a set number of years, which index funds do not levy.
• Rider stack: Optional income, death-benefit, or care riders that add 0.5% to 1.5% in many annuity contracts.

If the cheapest option on the list is still an annuity, the next move is often an IRA you control, once any match is captured and any surrender window is dated.

Why Some 403(b) Plans Cost More Than a 401(k)

Even the well-run half of the 403(b) market pays a structural premium. Vanguard’s June 2025 policy paper, using Brightscope and its own plan data, found 403(b) investments average 0.41% a year on an asset-weighted basis, against 0.33% in 401(k) plans, an 0.08% gap. In Vanguard-run plans the gap is 0.09%, because a typical collective investment trust costs 0.07% and a typical mutual fund costs 0.16%.

Unlike the 401(k) retirement plans offered to private sector workers, the 403(b) plans that nonprofit workers use typically cannot access low-cost collective investment trusts (CITs).

Malena de la Fuente, Ariana Abousaeedi, and Andy Reed, Vanguard policy research, June 2025

SECURE 2.0 fixed the tax-code side of that gap. It did not fix federal securities law, so 403(b) plans cannot hold collective trusts even when a hospital fiduciary wants them. Vanguard’s model, a worker earning $74,000, saving 11% from age 25 to 65, shows forgone $23,000 to $28,000 by retirement from that 0.08% to 0.09% alone.

That figure is the industry-average gap, including the good plans. It is a different number from the 1% to 3% all-in costs on many K-12 variable annuities. Do not average them. A teacher in a lounge-sold contract is not in Vanguard’s 0.41% sample in any useful sense.

THE TWO MARKETS IN ONE NAME

• $1.6 trillion: Assets in 403(b) plans on June 30, 2026, per the Investment Company Institute, against $10.8 trillion in 401(k) plans.
• 0.41% vs 0.33%: Asset-weighted average investment cost in 403(b) plans versus 401(k) plans in Vanguard’s Brightscope read.
• $23,000 to $28,000: Modeled wealth gap over a 40-year career from the 0.08% to 0.09% CIT bar alone.
• $13 billion: Employer money into ERISA 403(b) plans in 2023, 32% of that year’s contributions and 2.5 times the 2009 total.

The bipartisan Retirement Fairness for Charities and Educational Institutions Act (S. 424 and H.R. 1013) would let many 403(b)s hold CITs if a fiduciary screens the lineup. The House Financial Services Committee approved H.R. 1013 by 43-8 in May 2025. As of late 2026 it is still a bill, not a menu change.

The 15-Year Catch-Up 401(k) Workers Cannot Use

The one extra 403(b) actually writes into the code is a long-service catch-up. If the plan offers it, an employee with 15 years at the same public school, hospital, home-health agency, health and welfare agency, or church can raise the elective cap by the lesser of three tests.

THE IRS 15-YEAR TEST

• $3,000 cap: The extra in any one year cannot exceed $3,000.
• $15,000 lifetime: Prior extras under this rule reduce what is left of a $15,000 career ceiling.
• Under-saved test: $5,000 times years of service, minus elective deferrals already made for earlier years.

The limit on elective salary deferrals page is also strict on order. Dollars above $24,500 count toward the 15-year extra first, then toward the age-50 extra. People who stack both without running that order can blow the cap and have to correct it.

Not every 403(b) turns this on. The math is ugly enough that plan administrators, not a blog post, should run it. For a teacher who has stayed in one district for 15 years and has room under the tests, it is real money a 401(k) peer cannot copy.

Hospital 403(b) Plans Under ERISA Look Like 401(k)s

Saying “403(b) fees are higher” flattens two systems that share a code section. 401(k) plans sit under ERISA. Many 403(b) plans do too, especially at large hospitals and private universities. Governmental plans and many church plans do not. When a district or a church is exempt, fiduciary duty, Form 5500 filing, and creditor rules all change.

The Investment Company Institute and ISS Market Intelligence, in a September 30, 2026 release on 2023 ERISA 403(b) filings, describe a market that already shopped for index funds. In large ERISA 403(b) plans, index funds held 42% of assets, and 49% in plans above $1 billion. Mutual funds held 70% of those assets, variable annuities 15%, and fixed annuities 14%. Target-date funds rose to 34% of assets from 7% over the study window.

About half of ERISA 403(b) participants were in hospital plans (39% of those assets). Another 24% of participants were in educational services (43% of assets). Average participant-weighted total plan cost fell to 0.45% in 2023 from 0.68% in 2009. Asset-weighted cost fell to 0.37% from 0.59%.

THREE PLAN WORLDS, ONE CODE SECTION

Vesting can favor the 403(b) side. Employee deferrals are yours immediately. Some nonprofit matches vest faster than a private-sector schedule. An unvested match is still a promise, so ask for the clock before you treat it as cash.

One Elective Deferral Cap Across Both Plans

People do hold both. A nurse with a hospital 403(b) and a side 401(k), or someone who changed sectors mid-year, still has one $24,500 elective bucket for 2026. The IRS says you combine 403(b) deferrals with 401(k), SARSEP, and SIMPLE money. You do not get a second full cap.

Governmental 457(b) plans are the exception. Their $24,500 limit is separate. A teacher who has a 403(b) and a 457 can put $24,500 into each, $49,000 of employee money, before catch-ups. That stacking is a public-sector tool 401(k)-only workers do not have. Employer contributions follow their own 415 rules and are why this is a tax-pro conversation once the numbers get large.

After you leave, the exits match: leave the account, roll to a new employer plan that accepts transfers, or roll to an IRA. An IRA is usually how you escape a narrow, costly 403(b) menu. Read the surrender schedule first. Moving during a charge window can cost more than a year of high fees.

Judge the plan in front of you in that order: the match, the cheapest fund’s expense ratio, then the vest date. Plan type is a weak proxy. A university 403(b) with index funds and a match beats a thin 401(k) with no match. A lounge-sold annuity 403(b) with no match is a different product that happens to share a number in the tax code.

Frequently Asked Questions

Does a 403(b) Have to Let Every Employee Join?

If an employer lets one worker defer into a 403(b), the IRS universal-availability rule says the offer has to go to all employees of that organization. The employer may still leave out people expected to defer $200 or less, workers already in the employer’s 401(k), 457(b), or another 403(b), nonresident aliens, people who normally work under 20 hours a week, and certain students.

Can I Fund a 403(b) With Life Insurance?

Not with a policy issued after September 24, 2007. The IRS allows an annuity contract from an insurer, a custodial account in mutual funds, or a church retirement income account. Endowment, health, accident, and other insurance contracts are also out. Older life policies already inside a plan are a separate, plan-specific mess.

What Is the Early Withdrawal Penalty on a 403(b)?

In-service withdrawals can be allowed if the written plan says so, but a 10% extra tax can apply before age 59 and a half, on top of ordinary income tax, unless an IRS exception fits. Hardship rules and loan rules are plan terms, not automatic rights. ERISA 403(b)s also face tighter deposit-timing rules than many exempt governmental plans.

What If My 403(b) Has No Roth Option in 2026?

Many 403(b)s offer a designated Roth account, which works like a Roth 401(k): you pay tax now and qualified withdrawals, including earnings, come out tax-free. If your plan has no Roth account, workers whose 2025 FICA wages from that employer were above $150,000 cannot make catch-up contributions at all in 2026, because those catch-ups now have to be Roth.

Do Church and Public-School 403(b) Plans File Form 5500?

Only some 403(b)s do. Plans subject to ERISA follow Department of Labor rules that can include an EIN and an annual Form 5500. Governmental plans, many non-electing church plans, and 403(b)s that meet the DOL safe harbor for limited employer involvement are not under that ERISA filing regime, which is why a K-12 vendor list can look so different from a hospital plan.

Open the fee page on your own statement before you raise the deferral. The cheapest fund’s expense ratio, the match, and any surrender end-date decide more than the digits 403 or 401 on the folder.

Disclaimer: This article is news reporting and general explanation of how 403(b) and 401(k) plans are structured under IRS rules. It is informational only and is not tax, investment, or retirement-planning advice, and it does not recommend any fund, annuity, rollover, or contribution rate. Talk with a qualified tax professional or a fiduciary financial adviser who can review your own plan document, wage history, and state pension rules before you change deferrals or move money. Contribution limits, Roth-catch-up wage tests, and plan menus change, and the figures here reflect IRS and industry sources for 2026 as published in the documents cited.