Just when you thought you had this retirement saving thing figured out, someone may have mentioned a 401(a) plan and left you scratching your head once again. You're not alone in your confusion. Although the 401(k) and 401(a) are both retirement savings vehicles, far more people are familiar with the former. Much like a 401(k), a 401(a) plan is a way for employers to help their employees save for retirement. While public companies use 401(k) plans, most employers in the government and education sectors instead offer employees a 401(a). A 401(a) differs from a 401(k) in that making contributions is often mandatory. Under a 401(a), your employer will tell you how much you must invest in the plan and will maintain control over the plan's investment choices.
Who Gets What
If you've never heard of a 401(a) plan, it's likely because you're not eligible for one. One of the important differences between a 401(k) and a 401(a) is eligibility. Generally, corporate and private sector employers offer 401(k)s. Government employers and those in the educational sector, however, often offer 401(a)s. Which you're familiar with often depends on where you work.
It also may depend on your position. Employers who offer employees a 401(k) usually open the plan to everyone. Every full-time employee is welcome to participate in the plan, and all who do are subject to the same contribution limits, company match percentages and vesting schedule. This isn't the case with a 401(a). It's common for employers with a 401(a) plan to offer it only to certain employees. To be eligible, you may have to reach a certain age or a specific tier on the company's organizational chart.
Sources of Contributions
Whether you have a 401(k) or 401(a), the money invested in the plan comes from the same sources. The primary one is you. Each pay period, part of your pretax earnings get taken from your paycheck and deposited into your retirement account. If you have s 401(k), you choose how much to contribute each pay period. If you have a 401(a), your employer will dictate how much you invest.
After you make your contribution, your employer may choose to make one as well. The employer may offer a matching funds system or make profit-sharing deposits into individual employee accounts. Employers aren't required to make these contributions, and doing so is completely voluntary.
401(a) Venus 401(k) Investment Choices
To help your money grow, contributions made to your 401(k) or 401(a) plan get invested. With a 401(k), the retirement plan managers provide a variety of investment options for you to choose from. These choices all come with different levels of investment risk. You can opt for a higher risk investment vehicle that may provide a larger return on your investment or you can invest conservatively to protect your assets.
The money in a 401(a) also gets invested, but you're choices are much more limited. Your plan may only provide one or two investment choices or it may not provide any at all. Employers maintain more control over 401(a) accounts and may choose an investment plan for you.
Mandatory vs. Voluntary Savings
With a 401(k) plan, you decide how much of your paycheck you want to invest. You can even choose not to participate in the plan and save for your retirement another way. This is not the case with a 401(a). In this arrangement, participation in the plan is mandatory and your employer will decide how much you will invest. Not participating is not an option.
Being told what to do with your money may make you bristle, but 401(a) plans do offer benefits. With a 401(a) plan, you're assured a certain amount of retirement savings. With a 401(k) plan, you must make sure you save enough of your earnings to adequately fund your retirement.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.