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403(B) Versus Simple Ira

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I am also looking at whether we should simply use SIMPLE IRAs instead of 403(b). I know that SIMPLEs are cheaper for the employer. What I can't find is whether they are cheaper for the employer because they are indeed, simple, and so cheaper and easier to administer - or if any of the costs are sloughed off on to the employee. If the two plans potentially cost the same to the employee, and one is much cheaper than the other to administer - the only cost is a loss of flexibility - this is an important point. I can't find any expert who will say this. Lots of praises for how easy and cheap SIMPLEs are to administer - no talk about how it affects the employee.

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I am certainly not an expert on the subject of the SIMPLE IRA vs a 403b. However I have helped a relative set up a SIMPLE IRA for her small business (3 employees). So here's my two cents worth.

 

I think the SIMPLE IRA would be easier to administer because it doesn't have several of the features of 403b plans. The SIMPLE doesn't have to deal with employee loans and there's no 15 year catchup. There is a fairly large difference in the amount that can be contributed. For the 403b, it's 18k/yr with no employer contribution required. For the SIMPLE, the maximum is 12.5k/yr plus a 3% of income employer match. Instead of the 3% match, the employer can choose a 2%/yr required contribution to each employee, that doesn't require an employee contribution. The 403b plan may require the employer to hire a consultant to establish the plan, I don't know.

 

A big advantage of the SIMPLE IRA is that the employer can pick the providor, so Vanguard, Fidelity etc. with their low-cost index funds are available. It may be difficult to get these low-cost providors for your 403b plan.

 

A SIMPLE IRA can be set up using the IRS Form 5304 so that each employee can choose their own providor. This involves the employer having to fill out each providor's form to establish the employer's plan. I think most employers use the IRS Form 5305 which requires the employer choose a single providor. It's easier for the employer and if a good providor like Vanguard or Fidelity is chosen, it's to the employee's advantage.

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I was hoping that you would get some of the professionals who post on this forum to contribute their thoughts on your question. Maybe they will if you continue to post your thoughts?

 

If you posted your question on the BenefitsLink forum, you will probably get several professional opinions. That forum is mainly for discussions between plan administrators and professional plan advisors but I see they can be very helpful with questions from non-professionals. http://benefitslink.com/boards/index.php/forum/2-sep-sarsep-and-simple-plans/

 

Another option for you is to ask your question on the bogglehead.com forum. There you might get information from professionals and non-professionals who have first-hand experience deciding the question of a SIMPLE IRA vs a 403b.

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What I can't find is whether they are cheaper for the employer because they are indeed, simple, and so cheaper and easier to administer - or if any of the costs are sloughed off on to the employee.

 

I think the 403b plan will cost a non-profit several thousand to set up and maintain per year. The company has a choice to pay the costs themselves, or use a plan the puts those costs on the participants in the form of funds with higher expense ratios. If your organization is willing to pay the cost themselves, then as far as the employees are concerned, their costs (the ERs of the funds) might be about the same as those of a SIMPLE IRA plan. This would assume that the 403b plan includes low cost index funds.

 

There is no fee that the employer has to pay to set up or maintain a SIMPLE IRA plan. If a low cost providor like Vanguard or Fidelity is chosen by the employer, the employee will have excellent low cost index funds to choose from. If the 3% matching option is chosen, the employee that participates can contribute up to 12.5k plus 3% of their W-2 salary.

 

So it's possible for costs to be "sloughed off on to the employees" with a 403b plan, but not with a SIMPLE IRA plan that uses Vanguard or Fidelity.

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