The 401(k) type of retirement plan is used by many businesses and employers as a retirement savings incentive for employees. You may have read or heard a lot of advice on how to manage a 401(k) plan account. Some employers -- primarily in the education or government fields -- offer 401(a) types of retirement savings plans. The "401" designation indicates that these plans grew from the same part of the tax code but, like different kinds of mushrooms that grow from the same log, there are some significant differences.
Types of Employers
One major difference between 401(k) plans and 401(a) plans are the types of employers that offer the two different types of retirement savings plans. Corporate or private employers use 401(k) plans to provide tax-advantaged retirement savings plans for their employees. The 401(a) type of plan is primarily used by government employers. Another key difference: 401(k) plans are open equally to all employees in the company, with the same contribution limits, company match percentages and vesting schedules, but 401(a) plans are typically custom-designed plans that are only offered to key employees as an added incentive to stay with the operation. Many educational institutions and non-profits, for example, use 401(a) plans to fund retirement savings for certain employees. Your employer probably offers either a 401(a) or 401(k) depending on what your employer is -- a corporation or a government entity.
Sources of Contributions
With a 401(k) plan, an employee can elect to defer a portion of her wages into the plan to save for retirement. The employee decides how much of her pay she wants to deposit into her retirement account. The employer may offer a matching funds system or make profit-sharing deposits into the individual employee 401(k) accounts. With a 401(a) account, the contribution amounts and levels are set by the employer. The employer may make contributions and the employer may also require employee contributions into a 401(a) account. The employee generally does not get to decide how much money goes into a 401(a) retirement account.
Types of Investment Choices
With an employer-sponsored 401(k) plan, the employees must decide how their retirement savings is invested among a range of investment options chosen by the employer. With a 401(a) plan, the employer retains more control of the savings amounts and may also retain more control of the types of available investments. A 401(a) sponsor has the ability to offer investment choices similar to a 401(k) plan, so an employee should carefully review the plan materials offered by her employer.
Forced vs. Unforced Savings
If your employer provides a 401(a) savings plan, the contributions into the plan -- including your salary deferrals -- will be mandatory at the levels set by the employer. It may not be an option to not participate. With a 401(k) plan, the amount you contribute is entirely your choice. You may not want to save for retirement or you may want to defer the maximum amount of wages possible. With a 401(a) plan you will be assured of a certain level of retirement savings. With a 401(k) plan, you must make sure you save enough of your earnings into the plan to provide the level of savings you need at retirement.
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