A 401(a) plan is a form of retirement plan that allows employees and employers to make cash-based or percentage-based contributions for an employee's retirement account. With a 401(a) plan, the funding mechanism has three options:
- The employee can make retirement plan contributions
- The employer can make retirement plan contributions on behalf of the employee.
- Both the employee and the employer can make a contribution to the employee's retirement plan.
The primary benefits of a 401(a) retirement plan goes mainly to the employer, who retains more control over the funding of an employee's retirement savings plan with a 401(k) plan. The employer can not only establish eligibility criteria and vesting schedules with a 401(a) plan, the employer can also establish contribution limits and call the shots on plan management as it sees fit.
By and large, a 401(a) plan is offered to employees in public service vocations - especially teaching and education, non-profit organizations, or government agencies.
401(a) Plan Features and Benefits
Aside from giving more control of the plans to employers, 401(a) plans have some other unique features, as well.
Contributions 401(a) plans may possess two types of contribution models - voluntary and mandatory. Basically, employer contributions are mandatory, even if the employee elects not to steer any money into his or her plan. In addition, the employer will make the call on whether or not plan contributions are made on a pre-tax or after-tax basis.
As for voluntary contributions, you'll need to break out your calculator as most voluntary contributions to a 401(a) plan are made on an after-tax basis and is capped at 25% of your annual pay. You may opt for a 457(b) plan instead of making after-tax contributions to a 401(a) plan, as 457(b) plan contribution and 401(a) plan contributions are treated as separate plans with separate (and normally higher when combined) maximum contribution limits.
Plan Contribution Matching
With a 401(a) plan, employers will generally contribute a funding amount that matches a fixed percentage of what the employee contributes, up to a maximum funding amount.
Plan Investment Options A 401(a) plan's investment choices are provided by the employer, who also controls what types of investment are available to 401(a) plan users. Employers usually opt for safer, low-risk investment vehicles like value-based stock funds and government bonds.
Switchability Users of 401(a) plans have the option to transfer plan funds to a 401(k) or individual retirement account (IRA) when they leave a job for a new employer.
Vesting Schedules As noted above, the company or organization that offers the 401(a) plan will decide on the plan vesting schedule. That said, any contributions to the plan made by the employee, including any profits made on the plan's underlying investments, are immediately deemed as being "fully vested."
Typically, vesting schedules are tied tightly to an employer's years of service. Employers do so to incentivize employees to stay on the job longer, so their 401(a) plan assets are fully vested.
Withdrawal Rules 401(a) plan withdrawals are allowed when the plan participant is 59.5 years of age, passes away or is disabled, or when the recipient rolls the plan funds over to a qualified IRA. Any other withdrawals made are subject to the Internal revenue Service's 10% early withdrawal penalty.
What's the Difference Between 401(a) Plans and 401(k) Plans?
While 401(a) plans and 401(k) plans do share some commonalities, as both plans are geared toward tax-advantaged, long-term savings, and both are built on employee and employer contributions, there are significant differences between the two, as well.
Different Employer Models 401(k) plans are more prevalent among for-profit companies in the private sector, while 401(a) plans are geared toward public sector employers, like schools or government agencies. As private sector companies dominate the U.S. economy, 401(k) plans are by far the more prevalent employee retirement plan.
Availability Differences By design, 401(k) plans are typically made available to all full-time private-sector employees, while 401(a) plans are steered toward specific public sector employees selected by their employers.
Contribution Limits Contributions amounts of a 401(k) plan are left to the employees to decide. While the government does set a maximum contribution plan limit for 401(k)s, employees can invest a little or a lot, right up to the maximum contribution limit. With 401(a) plans, the employer establishes the plan's funding contribution limits.
Different Starting Points Both 401(k) and 401(a) plans have rules on the minimum age requirements of plan participants. For both plans, plan participants must be at least 21 years old. Tenure matters, too. For 401(k) plans, plan participants must be on the job for one year while 401(a) plan participants must have two years on the job.
Maximum Contribution Amounts The amount of money an employee can put into a 401(k) or 401(a) plan differs, as well. By law, workers can contribute up to $18,500 annually to a 401(k) plan. But 401(a) plans, however, have much larger contribution limits, maxing out at $56,000 annually in 2019. Note that with 401(a) plans there are no "catchup" contributions for plan participants over 50 years old.
Five Tips When Using a 401(a) Plan
To maximize your 401(a) plan experience, apply the same strategies you would for any long-term savings and investment plan, but with a 401(a) model wrinkle or two.
These tips will get you going in the right direction:
Work With Your Employer on Strategy Since your employer has more control over a 401(a) plan than a private-sector employer does over a 401(k) plan, it's a good idea to work with your organization to create the best plan strategy for your unique needs.
That means scheduling a meeting (or two) with your organization's benefits manager to discuss the right contribution level for you, ask about any investment advisory help from your employer to choose the right investments for your 401(a) plan, any employee matching contributions that are available, and any vesting, tax and withdrawal questions. It's always advisable to meet with your own financial planner first to set the stage for a good, long-term 401(a) plan experience.
Understand 401(a) Plan Rules Like a 401(k) plan, a 401(a) plan's rules and mandates are dynamic and change every year. Take contribution levels, for example. With a 401(a) plan, those annual limits can and do change every year so it's up to you to be cognizant of the yearly plan changes so you can adjust your contribution levels as needed.
Focus on Asset Allocation Any good long-term investment plan requires the right financial vehicles at the right time. For instance, when you're young and you have the time to recover from any portfolio management mistakes, investing in stocks is a good idea, as stocks represent your best chance of portfolio growth.
When you hit your mid-40s and middle age, you may be dealing with extra households costs like college tuition, mortgage payments, (possibly) divorce and single parenthood, and (possibly) care for ailing senior parents. Those scenarios require some special care with your 401(a) plan, as you need to shift to capital preservation mode to better protect the assets you've already accumulated.
That could mean a heavier dose of bonds and conservative stock funds for your retirement plan. Or, it could mean opting for age-specific target date or target-risk funds. Again, a good financial adviser can help you adjust your portfolio investments as your personal financial situation changes, too.
Choose a Beneficiary When you open your 401(a) account you'll be asked to designate a plan beneficiary (or beneficiaries) who will receive plan benefits in the event of your death.
That's an important component of a 401(a) plan, as a designated beneficiary guarantees your plan assets will go to where you intend them to go. Designating beneficiaries can help ensure your assets are paid per your wishes, while avoiding having to rely on probate court to handle the distribution of your retirement portfolio. With 401(a) plan, your spouse will likely be your designated beneficiary, although you can change your beneficiary later on.
Watch Out for High Plan Administration Fees Like with a 401(k) plan, employers usually bring in multiple specialists to handle the plan's administration (think investment advisers, tax specialists, and operational/back office support.)
That usually means fees added to the management of your 401(a) plan, which eats into your plan's portfolio gains. Ask your employer about any and all fees attached to the management of your 401(a) plan, and ask if there are any way fees can be waived or curbed.
You'd be surprised how high plan administration fees can negatively impact your 401(a) plan performance, so make it a point to get a good grip on plan fees and how they can be minimized.
It's never too late - or too early - to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.