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Safe Harbor 401k Plan: What Is It? Is It for You?

Safe harbor 401(k) plans enable companies to sidestep the annual IRS testing that comes with traditional 401(k) plans, in part by providing a contribution to all employees’ retirement accounts that vests immediately.

Typically a perk used to attract top talent, safe harbor 401(k) plans are a way for highly compensated employees, like company executives and owners, to save more than a traditional 401(k) plan would normally allow.

With traditional 401(k) plans, contributions from highly compensated employees can’t comprise more than 2% of the average of all other employee contributions, in addition to other restrictions. However, with safe harbor 401(k) plans, those limits don’t apply.

Keep reading to learn more about safe harbor rules, why companies use these plans, along with the benefits, drawbacks, and relevant deadlines.

Recommended: What is a 401K Plan and How Does it Work?

Safe Harbor 401(k) Plans Defined

A 401(k) safe harbor plan behaves much the same way a traditional 401(k) plan does — but with a twist. In both cases, eligible employees can use the plan to deposit pre-tax funds for their retirement and employers can contribute matching funds.

But with an ordinary 401(k) retirement plan, companies must submit to annual nondiscrimination regulatory testing by the IRS to ensure that the company plan doesn’t treat highly compensated employees (HCEs) — generally defined as earning at least $130,000 a year or owning 5% or more of the business — more favorably than others.

But the testing process is complex and onerous, as we’ll cover below in the section on safe harbor 401(k) rules.

An alternative is to set up a safe harbor 401(k) plan with a safe harbor match. This allows a company to skip the annual IRS testing — and avoid imposing restrictions on employee saving — by providing the same 401(k) contributions to all employees, regardless of title, salary, or even years spent at the company. And those funds must vest immediately.

This is an important benefit, because in many cases, employer contributions to ordinary 401(k) plans vest over time, requiring employees to stay with the company for some years in order to get the full value of the employer match. Often, if you leave before the employer contributions or match have vested, you may forfeit them.

For smaller companies, it may be worth making the extra safe harbor match contributions in order to avoid the time and expense of the IRS’s annual nondiscrimination testing. For larger companies, giving all employees the same percentage contribution could be expensive. But the upside is that highly paid employees can then make much larger 401(k) contributions without running afoul of IRS rules, a real perk for company leaders. In addition, 401(k) safe harbor plans are typically less expensive to set up than traditional plans.

What Are Nondiscrimination Tests, and How Do They Affect Your 401(k) Plan?

To understand the benefit of safe harbor plans, it helps to see what employers with traditional 401(k) plans are up against in terms of following IRS rules and submitting to the annual nondiscrimination tests. To confirm there is no compensation discrimination, the company must conduct Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and Top Heavy tests.

If the company fails one of the tests, it could mean considerable administrative hassle, plus the expense of making corrections, and potentially even refunding 401(k) contributions.

Before explaining the details of each test, here’s how the IRS defines highly compensated employees (HCEs) and non-highly compensated employees (NHCEs).

To be a HCE:

• The employee must own more than 5% of the company at any time during the current or preceding year (directly or through family attribution).

• The employee is paid over $130,000 in compensation from the employer during the current or previous year. The plan can limit these employees to the top 20% of employees who make the most money.

Employees who don’t fit these criteria are considered non-highly compensated. The nondiscrimination tests are designed to assess whether top employees are saving substantially more than the rank-and-file staffers.

• The Actual Deferral Percentage (ADP) test measures how much income highly paid employees contribute to their 401(k), versus staff employees.

• The Actual Contribution Percentage (ACP) test compares employer retirement contributions to HCEs versus the contributions to everyone else.

According to the IRS, the terms of the ADP test — which compares the amounts different employees are saving in their 401(k)s — are met if the ADP for highly compensated employees (HCE) doesn’t exceed the greater of:

• 125% of the deferral percentage for ordinary, i.e., non-highly compensated employees (NHCEs)

Or the lesser of:

• 200% of the deferral percentage for the NHCEs

• or the deferral percentage for the NHCEs plus 2%.

The ACP test is met if the deferral percentage for highly compensated employees doesn’t exceed the greater of:

• 125% of the deferral percentage for the NHCEs,

Or the lesser of:

• 200% of the deferral percentage for the group of NHCEs

• or the deferral percentage for the NHCEs plus 2%.

Last, the top-heavy test measures the value of the assets in all company 401(k) accounts, total. If the 401(k) balances of “key employees” account for more than 60% of total plan assets, the 401(k) would fail the top heavy test. The IRS defines key employees somewhat differently than highly compensated employees, although both groups are similar in that they earn more than ordinary staff.

As you can see, maintaining a traditional 401(k) plan, and meeting these requirements each year, can be a burden for some companies. Fortunately, it’s possible to set up a safe harbor 401(k) plan, avoid the annual nondiscrimination tests, and provide additional 401(k) savings for employees.

Requirements for a Safe Harbor 401(k)

To fulfill the safe harbor 401(k) requirements, the employer must make qualifying 401(k) contributions (a.k.a. the safe harbor match) that vest immediately. The company contributes to employees’ retirement accounts in one of three ways:

Non-elective: The company contributes the equivalent of 3% of each employee’s annual salary to a company 401(k) plan, regardless of whether the employee contributes.

Basic: The company offers 100% matching for the first 3% of an employee’s 401(k) plan contributions, plus a 50% match for the following 2% of an employee’s contributions.

Enhanced: The company offers a 100% company match for all employee 401(k) contributions, up to 4% of a staffer’s annual salary.

Safe Harbor Contribution Limits

Just like traditional 401(k) plans, the maximum employee contribution limit for a safe harbor plan is $19,500 per year. If you are over 50, you would be eligible for an additional $6,500 catch-up contribution, if your plan allows it.

But in a safe harbor plan, a company owner can reserve the maximum $19,500 (in 2021) for their plan contribution and also boost contribution payments to valued team members up to an individual profit-sharing maximum amount of 100% of their compensation, or $58,000 ($64,500 for those over age 50) — whichever is less.

Regular employees are allowed the standard maximum contribution limit of $19,500, plus anyone over age 50 can contribute an extra “catch-up” amount of $6,500. Those are the same maximum contribution ceilings as regular 401(k) plans.

Benefits of Offering a Safe Harbor 401(k) Plan

By creating a safe harbor 401(k) plan, a business owner can potentially attract and maintain highly skilled employees. Employees are attracted to higher retirement plan contributions and the ability to optimize retirement plan contribution amounts, ensuring more money for long-term retirement savings.

Plus, a safe harbor 401(k) plan can also help business owners save money on the compliance end of the spectrum. For example, companies save on regulatory costs by avoiding the costs of preparing for a nondiscrimination test (and the staff hours and training that goes with it).

There are some additional upsides to offering a safe harbor 401(k) retirement plan, for higher paid employees and regular staff too.

Playing catch up. If a company owner, or high-level managers, historically haven’t stowed enough money away in a company retirement plan, a safe harbor 401(k) plan can help them catch up. The same may be true, although to a lesser degree, for regular employees.

The spread of profit. Suppose a company has a steady and robust revenue stream and is managed efficiently. In that case, company owners may feel comfortable “spreading the wealth” with not only high-profile talent but rank-and-file employees, too.

Encourage retirement savings. Suppose a company is seeing weak contribution activity from its rank-and-file employees. In that case, it may feel more comfortable going the safe harbor route and at least guaranteeing minimum 401(k) contributions to employees while rewarding higher-value employees with more lucrative 401(k) plan contributions.

Potential Drawbacks of a Safe Harbor 401(k) Plan

Safe harbor 401(k) plans have their downsides, too.

Expense. The matching contribution requirements can add up to a hefty expense, depending on employee salaries. And because employees are vested immediately, there’s no incentive to stay with the company for a certain period.

Termination fees. If a company introduces a safe harbor 401(k) plan, it must commit to it for one calendar year, no matter how the plan is performing internally. Even after a year, 401(k) plan providers (which administer and manage the retirement plans) usually charge a termination fee if a company decides to pull the plug on its safe harbor plan after one year.

Filing Deadlines for a Safe Harbor 401(k) Plan

Companies that opt for a safe harbor 401(k) plan have to adhere to strict compliance filing deadlines. These are the dates worth knowing.

October 1: That’s the deadline for filing for a safe harbor 401(k) for the current calendar year. This deadline meets the government criteria of a company needing to have a safe harbor 401(k) in operation for at least three months in a 12 month period, for the first year operating a safe harbor plan.

November 1: For companies with a safe harbor plan already in place, November 1st represents the last date a business can change the structure of a safe harbor plan. Regulators stipulate the November 1 deadline date for plan changes so notices can be transmitted to employees by December 1, giving them time to prepare for the next calendar year.

December 1: By this date, all companies — whether they’re rolling out a brand new safe harbor plan or are administering an existing one — must issue a formal notice to employees that a safe harbor 401(k) will be offered to company staffers.

January 1: The date that all safe harbor 401(k) plans are activated.

For companies that currently have no 401(k) plan at all, they can roll out either a traditional 401(k) plan or a safe harbor 401(k) plan at any point in the year, for that calendar year.

The Takeaway

Companies that don’t want the regulatory obligations of a traditional 401(k) plan, and want to prioritize talent acquisition and retention may want to consider safe harbor 401(k) plans.

These plans allow an employer to bestow extra retirement benefits on high-value employees, making an overall compensation package more desirable. But a business owner needs to weigh the pros and cons of a safe harbor 401(k) plan because, in some cases, it can be expensive for a company to maintain.

For business owners who aren’t sure which retirement plan is suitable for their company and their employees, it can be helpful to do some research. With SoFi Invest®, you can also open an online retirement account to gain access to more resources, including complimentary access to financial advisors.

Planning for retirement? Learn how working with a financial planner can help you reach your goals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .
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401(k) Vesting: What Does Vested Balance Mean?

401(k) Vesting: What Does Vested Balance Mean?

Your 401k vested balance refers to how much of your contributions you own and would if you left your company. Contributions that employees make to their 401(k) accounts are always 100% vested; they own them outright.

However, this is not always true of the money employers put into their employees’ accounts, including matching funds. Those contributions may only belong to an employee after they’ve worked for the company for a certain amount of time, the company’s vesting period.

If you were to leave your job before reaching that milestone, you could forfeit some or all of the employer-contributed money in your account. The amount that you get to keep is the “vested balance.” Other qualified defined contribution plans, such as 401(a) or 403(b) plans may also be subject to vesting schedules.

Here’s a deeper look at what being vested means and the effect it can have on your retirement savings.

401(k) Contributions Basics

Before you can understand vesting, it’s important to know how 401(k) contributions work. A 401(k) is an employer-sponsored retirement plan that allows employees to make elective deferrals of part of their salary on a pre-tax basis (they can choose how much of their salary to contribute from each pay period).

As of 2021, employees can contribute up to $19,500 annually in their 401(k) accounts, with an extra $6,500 in catch-up contributions allowed for those who are age 50 or older. Employees can then invest their contributions, often choosing from a menu of funds or other investments offered by their employer.

The IRS also allows employers to contribute to their employees’ plans. Often these contributions come in the form of a 401(k) match. For example, an employer might offer matching contributions of 3% or 6% if an employee chooses to defer 6% of their salary.

In 2021, the total contributions that an employee and employer can make to a 401(k) cannot exceed 100% of the employee’s salary or $57,000, ($63,500 including catch-up contributions,) whichever is less.

Employer contributions are a way for businesses to encourage their employees to save for retirement. They’re also an important benefit that job seekers look for when searching for new jobs.

Recommended: What Exactly is a 401(k)?

What Is Vested Balance?

The vested balance is the amount of money that belongs to you and cannot be taken back by an employer when you leave your job—even if you are fired.

Contributions that you make to your 401(k) are automatically 100% vested. Vesting of employer contributions typically occurs according to a set timeframe known as a vesting schedule. When employer contributions to a 401(k) become vested, it means that money is now fully yours.

Being fully vested means that when you leave the company, those employer contributions will remain in your account. It also means that you can decide to roll over your balance to a new account, start making withdrawals, or take out a loan against the account, if your plan allows it. However, keeping a vested 401k invested and letting it grow over time may be one of the best ways to save for retirement.

You’ll owe taxes on withdrawals made before age 59 ½, and they may be subject to early withdrawal penalties, plus you’ll miss out on future growth of those earnings.

Whether a company contribution is vested will depend on what type of contribution it is. Contributions known as safe harbor matches are immediately 100% vested. Employers may make these matching contributions only for employees who themselves make elective deferrals to their account. Or they can make contributions on behalf of all employees whether or not those employees make contributions themselves.

Matching contributions that do not fall under the safe harbor provision and profit sharing contributions may both be subject to a vesting schedule. While contributions to traditional and Roth 401(k)s may be subject to vesting rules, that is not the case with SIMPLE 401(K)s. All contributions to these accounts are fully vested when they are made.

Recommended: How Much Should I Put Towards My 401(k)?

How Do I Know if I Am Fully Vested in my 401(k)?

If you’re not sure whether or when you will be fully vested, you can check their plan’s vesting schedule, usually via your online benefits portal.

Immediate Vesting

Immediate vesting is the simplest form of vesting schedule. Employees own 100% of contributions right away.

Cliff Vesting

Under a cliff vesting schedule, employer contributions are typically fully vested after three years of service. Federal law requires that 401(k) plans using a cliff vesting schedule wait no longer than three years for funds to be fully vested. A year of service is usually defined as 1,000 hours of work over a 12-month period.

Graded Vesting

Graded vesting is a bit more complicated. A percentage of contributions vest over the course of a set period of time, and employees gain gradual ownership of their funds. Eventually they will own 100% of the money in their account.
For example, a hypothetical six-year graded vesting schedule might look like this:

Years of Service

Percent Vested

1 0%
2 20%
3 40%
4 60%
5 80%
6 100%

All employees must be fully vested by the time they reach retirement age under the plan or if the company decides to terminate the plan.

Why Do Employers Use Vesting?

Offering 401(k) matching contributions is a benefit that employers may use to attract talented employees. More than three-quarters of companies who have a retirement plan offer some sort of employer match on contributions.

After hiring employees, the vesting schedule may help companies retain their best workers, encouraging them to stay with the company over the long term. Hiring and training new employees is a costly process for businesses. Withholding employer retirement contributions is a way to incentivize employees to stay at least as long as it takes for them to be fully vested.

You may want to take vesting schedules into account before getting a new job. If you’re only one year away from being 100% vested, you may decide it’s worth waiting the extra time before leaving the company for another opportunity. But the decision is a personal one: For example, if a potential new position offers a much higher salary, you might do your own math and decide that the gains from the higher salary overshadow the losses from leaving a percentage of unvested funds on the table.

What Happens If I Leave My Job Before I’m Fully Vested?

If you leave your job before being fully vested, you forfeit any unvested portion of their 401(k). The amount of money you’d lose depends on your vesting schedule, the amount of the contributions, and their performance. For example, if your employer uses cliff vesting after three years and you leave the company before then, you won’t receive any of the money your employer has contributed to their plan.

If, on the other hand, your employer uses a graded vesting schedule, you will receive any portion of the employer’s contributions that have vested by the time they leave. For example, if you are 20% vested each year over the course of six years, and you leave the company shortly after year three, they’ll keep 40% of the employer’s contributions.

Other Common Types of Vesting

Aside from 401(k)s, employers may offer other forms of compensation that also follow vesting schedules, such as pensions and stock options. These tend to work a little bit differently than vested contributions, but both pensions and stock options may vest immediately or by following a cliff or graded vesting schedule.

Stock Option Vesting

Stock options give employees the right to buy company stock at a set price and at a later date, regardless of the stock’s current value. The idea is that between the time an employee is hired and their stock options vest, the stock price will have risen. The employee can then buy the stock and sell it to make a profit.

Pension Vesting

With pensions, vesting schedules determine when an employee is eligible to receive their full benefit.

How Do I Find Out More About Vesting?

There are a few ways to find out more about vesting and your own 401(k) vested balance. This information typically appears in the 401(k) summary plan description and/or the annual benefits statement.

Generally, the plan administrator or human resources department of a company can also explain the company’s vesting schedule in detail, and even pinpoint exactly you are in your vesting schedule. Understanding this information can help you understand the actual value of your account.

The Takeaway

While any employee contributions to 401(k) plans are immediately fully vested, the same is not always true of employer contributions. The employee may gain access to employer contributions slowly over time, or all at once after they’ve been employed by the company for a number of years.

Understanding vesting and your 401(k)’s vesting schedule is one more piece of information that can help you plan for your financial future. A 401(k) and other retirement accounts can be important components of a retirement savings plan. Knowing when you are fully vested in a 401(k) can help you understand how much money might be available to you when you retire.

There are many ways to save for retirement, including opening a traditional or Roth IRA. To get started with those, you can open an online retirement account on the SoFi Invest® platform. With SoFi, members can build a diversified portfolio and get advice from financial planners at no additional cost.

Find out more about investing with SoFi today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

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A Guide to the 403b Retirement Plan

A Guide to the 403(b) Retirement Plan

If you work for a nonprofit, you typically have access to a 403b plan rather than a 401(k). There are some differences between the two, but like a 401(k), a 403b is one of the easiest and most effective ways to start saving for your golden years.

This article dives into the nitty-gritty details of 403b plans, also known as tax-sheltered annuities or TSAs. What are they, how do they work, and who is eligible?

What Is A 403(b) Retirement Plan?

The 403(b) retirement plan is a type of qualified retirement plan designed to help employees save for retirement. Certain schools, religious organizations, hospitals and other organizations often offer this plan to employees. (In layman’s terms: it’s the 401(k) of the nonprofit world.)

Like 401(k)s, 403(b) plans allow for regular contributions toward an employee’s retirement goal. Contributions are tax-deductible in the year they’re made. Also, you won’t pay taxes on any earnings in the account until you make withdrawals.

However, unlike 401(k)s, 403(b)s sometimes invest contributions in an annuity contract provided through an insurance company rather than allocate it into a stocks-and-bonds portfolio. A custodial account may also use the funds to invest in mutual funds.

403(b) Rules

Like other retirement plans, 403(b)s have limits on how and when participants can take distributions. Generally, account holders cannot touch the funds until they reach age 59.5 without paying taxes and a penalty. Furthermore, required minimum distributions, or RMDs, apply to 403(b) plans and kick in at age 72.

Who Can Participate in a 403(b) Plan?

Only employees of specific public and nonprofit employers are eligible to participate in 403(b)s, as are some ministers. You may have access to a 403(b) plan if you’re any of the following:

•  An employee of a tax-exempt 501(c)(3) nonprofit organization

•  An employee of the public school system, including state colleges and universities, who is involved in the day-to-day operations of the school

•  An employee of a public school system organized by Indian tribal governments

•  An employee of a cooperative hospital service organization

•  A minister who works for a 501(c)(3) nonprofit organization and is self-employed, or who works for a non-501(c)(3) organization but still functions as a minister in their day-to-day professional life

Employers may automatically enroll employees in a 403(b), though employees can opt out if they so choose. Of course, participating in an employer-sponsored retirement plan is one good way to start saving for retirement.

How Much Can You Contribute to a 403(b)?

In 2021, workers can put up to $19,500 into a 403(b) plan without paying taxes on it. Workers who’ve been with their employer for 15 years may be able to contribute an additional $3,000 and those age 50 or older can contribute an additional $6,500.

You can contribute to your 403(b) through automatic paycheck deductions. This process is similar to how it works with a 401(k)—the employee agrees to have a certain amount of their salary redirected to the retirement plan during each pay period.

However, other types of contributions are also eligible, including:

•  Nonelective contributions from your employer, such as matching or discretionary contributions

•  After-tax contributions can be made by an employee and reported as income in the year the funds are earned for tax purposes. These funds may or may not be designated Roth contributions. In this case, the employer needs to keep separate accounting records for Roth contributions, gains, and losses

How Are 401(k)s and 403(b)s Different?

One notable difference between 403(b) plans and 401(k) plans is there is no profit sharing in 403(b)s—workplaces that are 403(b)-eligible aren’t working toward a profit.

How Much Should You Contribute to a 403(b) Plan?

If your employer offers a match, you should aim to contribute at least enough to get the full match. Not doing so is like leaving free money on the table.

Beyond that, many financial advisors suggest shooting to save at least 10% of your income for retirement, but you may be able to save less if you have access to guaranteed retirement income such as a pension, as many teachers do.

Recommended: Explaining the 3-Legged Stool of Retirement

If 10% seems like an unreachable goal, contribute what you can, and then consider increasing the amount that you save each time you get a raise. That way, the higher contribution will not put as much of a dent in your take-home pay.

Doing some calculations to figure out how much you need to save and when you can retire can help you determine the best amount of save.

Recommended: How to Save for Retirement

What Types of Investments Go in 403(b) Plans?

One way 403(b) plans diverge from other retirement plans, like 401(k)s and even IRAs, is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds, 403(b)s commonly invest in annuity contracts sold by insurance companies.

Part of the reason these plans are known as “tax-sheltered annuities” is that they were once restricted to annuity investments alone—a limit removed in 1974. While many 403(b) plans still offer annuities, they have also largely embraced the portfolio model that 401(k) plans typically offer.

Can You Borrow Against 403(b) Plans?

There are rules that limit how and when the account holder can access funds in a 403(b) account. Generally, employees (or their beneficiaries) can’t take distributions, without penalties, from their 403(b) plan until they reach age 59 ½.

However, some 403(b) plans do allow loans and hardship distributions. Loan rules vary by the plan. Hardship distributions require the employee to demonstrate immediate and heavy financial need to avoid the typical early withdrawal penalty.

As with other retirement accounts, distributions taken outside of the permitted limits incur a 10% early distribution penalty on top of regular income taxes that are still owed on the money.

What Are 403(b) Plan Requirements?

The IRS states that a 403(b) plan “must be maintained under a written program which contains all the terms and conditions.” In other words, for the plan to be legitimate, paperwork is required.

However, this paperwork may not necessarily be a single document so that an employee may get a whole packet of information as part of the onboarding process. This package can include salary reduction agreement terms, eligibility rules, explanations of benefits, and more.

In certain limited cases, an employer may not be subject to this requirement. For example, church plans that don’t contain retirement income aren’t required to have a written 403(b) plan.

Who Doesn’t Qualify for 403(b) Plan Participation?

Employers must offer 403(b) coverage to all qualifying employees if they offer it to one, known as “universal availability.” However, plans may exclude certain employees, including those under the following circumstances:

•  Employees working fewer than 20 hours per week

•  Employees who contribute $200 or less to their 403(b) each year

•  Employees who participate in retirement plan, like a 401(k) or 457 of the employer

•  Employees who are non-resident aliens

•  Employees who are students performing certain types of services

However, the same laws that allow these coverage limits also require employers to meet non-discrimination standards. They require employers to give employees notice of specific significant plan changes, like whether or not they have the right to make elective deferrals.

Can Employers Terminate 403(b) Plans?

An employer has the right to terminate a 403(b), but they’re required to distribute all accumulated benefits to employees and beneficiaries “as soon as administratively feasible.”

Employees may be eligible to roll their 403(b) funds over into a new retirement fund upon termination.

Saving for Retirement Without a 403(b) Plan

Even if an employee doesn’t have access to an employer-sponsored account, there are other ways to save for retirement. For instance, IRAs are a popular option among the self-employed and freelancers, who can use their tax benefits to help get a leg up on their retirement savings.

IRAs come in various options, but the two most common for individuals are Roth and traditional—with after-tax and pre-tax contributions, respectively. (In other words, you pay taxes on funds contributed to a Roth before they go into the account, whereas you pay taxes on funds contributed to a traditional IRA after you take the distribution.)

While the tax incentives and special early distribution rules built into retirement-specific accounts are attractive, the primary motivator for most retirement investors is the power of compound interest. By regularly contributing to an investment account and maintaining fund allocation account holders could see an exponential amount of growth over time.

Recommended: 4 Places to Put Your Retirement Money

The Takeaway

If you work for a nonprofit employer, contributing to a 403(b) is a great, tax-efficient way to start saving for retirement. The earlier you can start saving for retirement, the more valuable your contributions will be over time, thanks to the magic of compound interest.

If your employer does not offer a 401(k), or if you’re interested in additional ways to save or invest for retirement, opening an online retirement account could be a good solution. Along with regular investment accounts, SoFi also offers a range of retirement account options, including both Roth and traditional IRAs.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Purchasing Power 101: Examining the Value of the US Dollar

Purchasing Power 101: Examining the Value of the US Dollar

Purchasing power is a concept used to express the amount of goods and services a consumer or business can buy with a given unit of currency. In the United States, purchasing power is directly linked to the value of the dollar.

Due to inflation, a dollar today typically won’t go as far as it did last year. And a dollar next year won’t buy the same things that it did this year. This fluctuation in US dollar purchasing power is constant, and goes unnoticed, except in times of extreme inflation.

How Does Purchasing Power Impact Investors?

Once you understand the purchasing power definition, you can start to understand its context for investing. The purchasing power of a dollar affects investors because it makes an impact on virtually every aspect of the broader economy. When the dollar buys less, it changes the shopping decisions of consumers, the hiring practices of employers, the strategic decisions of corporations, and the monetary policy of the Federal Reserve.

One way to track inflation and purchasing power of a dollar is the Consumer Price Index (CPI), a statistic compiled by the US Bureau of Labor Statistics (BLS), which reports the figure every month. The statistic measures the average of prices of a set of goods and services in sectors such as transportation, food, and healthcare. Economists consider it a valuable gauge of the ever-changing cost of living, though it does exclude some important spending categories, including real estate and education.

Investors, executives and policymakers use CPI as a lens through which to scrutinize other economic indicators, including sales numbers, revenues, earnings and so on. It also determines the payments made to the millions of people on Social Security, which gets adjusted for the cost of living every year, and retirees drawing a pension from the military or the Federal Civil Services.

Why Does the Value of the Dollar Change?

A number of factors drive the value of the US dollar, including large scale factors having to do with economic cycles, government politics and international relations. But the dollar has also experienced inflation for most of the last century.

Inflation rose after World War I amid increased demand for food and other raw materials, which raised prices of most consumer goods up until the Great Depression, in which the country experienced prolonged deflation.

That’s when President Franklin Roosevelt stepped in with a surprising policy decision: He banned private ownership of gold, and required people to sell their holdings to the government. That allowed the Federal Reserve to increase the money supply and stop deflation in its tracks.

Since 1933, through World War II, the Cold War, and a host of changing monetary and economic policies, the US dollar has seen various rates of inflation. It reached its peak during the late 1970s and early 1980s oil and gas shortages exacerbated existing inflation and led to a gas shortage, and an increase in the price of manufacturing and shipping of nearly every single consumer good. Using 2020 dollars as a measure, the dollar fell from $6.39 in 1971 to just $2.28 in 1987.

Inflation rose at a more steady pace through the 1990s, falling to historically low levels in the past decade. One reason for the ongoing inflation is that the Federal Reserve continually increased the money supply via economic stimulus. The logic is simple supply and demand: If there are more dollars, then each one is worth less in terms of purchasing power.

In response to the Covid-19 pandemic and the ensuing lockdowns, the Federal Reserve has injected trillions into the economy. That, along with other stimulus measures, has many investors worried about the impact on the purchasing power of the dollar, and what that might mean for the broader economy.

What Purchasing Power Means for Investors

Generally, investors consider inflation a headwind for the markets, as it drives up the costs of materials and labor, boosts the cost of borrowing and tends to reduce consumer spending. That all tends to translate to lower earnings growth, which can depress stock prices.

But after decades of steady inflation, the markets have priced in a certain amount of shrinkage when it comes to the purchasing power of the dollar. Inflation has a great impact when it occurs suddenly and unexpectedly.

But inflation can have benefits for investors as well. During an economic upswing, inflation is a reliable side effect of prosperity, since economic booms produce higher profits, which drives up the markets. Historically, some experts say that the decades when the S&P 500 Index has delivered the highest returns have been when inflation has been between 2% to 3% annually.

Investors saving for long-term goals, such as retirement, must take declining purchasing power into account when determining how much they’ll need to reach those goals.

How Does Inflation Influence Stocks?

Inflation impacts different types of stocks differently, and there are several strategies that investors can use to hedge against inflation. During periods of high inflation, growth stocks tend to underperform, simply because so much of their value is tied up in the expectation of future earnings, and inflation diminishes those expectations.

Value stocks, on the other hand, typically boast steadier earnings, and are valued in line with those earnings. As a result, value stocks, as a category, tend to hold up better during periods of high inflation.

Recommended: Exploring Different Types of Investments

Other investments to consider during periods of high inflation include dividend-paying utility stocks and REITs, gold and other commodities. And because periods of high inflation usually brings higher interest rates, it can be a good time to buy bonds, especially government bonds

The Takeaway

The value of the dollar, in terms of what it can buy, changes over time, but inflation isn’t always bad news for investors. Some stocks may perform better than others in an inflationary environment, and higher interest rates may be good news for bond investors and savers.

If you’re ready to build a portfolio taking your inflation expectations into account, a great way to start is via the SoFi Invest® brokerage platform. You can use the platform to purchase stocks, exchange-traded funds (ETFs) and cryptocurrency.

Photo credit: iStock/pcess609


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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