What qualifies as a permissible investment for a 401(k) plan
is permissible in a 403(b) plan.
Advisers also tend to be unaware of 403(b) investment
restrictions. For the most part, says Richardson, 401(k) plans are not limited
in what they can invest in. On the other hand, he says, Internal Revenue Code
and ERISA rules generally limit 403(b) plans to investing in annuities or mutual
funds in custodial accounts.
Additionally, under 403(b) rules, he says, investment funds
are required to be a registered investment company under the 1940 Act. Many
advisers are not aware of that. For example, Richardson recently worked for an
adviser that had a 403(b) account. The adviser was putting the 403(b) plan into
exchange-traded funds (ETFs), even though the ETFs were not mutual fund
investment accounts and did not qualify under the 1940 Securities and Exchange
Act. Not all ETFs are registered investment companies under the 1940 Act,
though many are, Richardson explains. If the ETF is not a registered investment
company, it would not be an eligible 403(b) investment; it is a misconception
that all ETFs are eligible.
403(b) plans are subject to draconian contribution limits
and cannot be rolled over.
It used to be the case that 403(b) plans were subjected to
“draconian” contribution limits, says Richardson. However, although a “maximum
exclusion allowance” still applies, the formulistic limit on amounts that can
be contributed was eliminated about a decade ago, he says.
Furthermore, says Richardson, it used to be the case that
403(b) plan assets could not be rolled over to any other type of plan other
than another 403(b) plan, but now you can roll 403(b) assets over to any
eligible retirement plan as long as the plan will accept the rollover.