When it comes to retirement savings plans, 401(k) and 401(a) are the two a lot of you should really look into. Just as their names suggest, although based on the same tax code “401”, they are with the different suffixes of “k” and “a”, which also indicates that they are something different. While they are closely related to the interest of both employers and employees, unfortunately many of you haven’t the slightest inkling about them even though you have already participated in these accounts for years. That is partly because the daunting, unfathomable legal terminology. In this case, now let’s analyze their difference carefully and then explain them in simple terms.
Firstly, the providers of the retirement savings plans between them are different. That’s to say, different employers tend to give you different plans. If you are hired by public and private companies, what the employers offer is often a 401(k) plan, which allows you to enjoy tax advantages; if you work for government, non-profits, or educational institutions, more often than not the employer will provide you with a 401(a) plan.
Secondly, the purposes of the employers are different. As for 401(k) plans, all the employees are treated equally in the same companies. In other words, that means all the members in the same entity enjoy the same benefits, including vesting schedules, percentage match, and limits on the amount of contributions. In terms of 401(a) plans, they are not available to all employees. Instead, they are used only as part of an important incentive system by the employers. This design intention actually limits only a few of “top performers” can enjoy this bonus. And here the reason for 401a is twofold: to motivate employees plus to recruit and retain talent.
Thirdly, the degree of control in investments between them is different. Since a 401k plan is one of retirement plans sponsored by employers, who are in a position to choose a variety of different investment option for their employees to choose from. So, as the employee you have to make the decision among the choices available. In comparison, a 401a plan allows the employers to have more control on the saving amounts and investments types. However, both accounts offer roughly the same investment choices. For that reason, you should scrutinize the plan before you making a final decision. Or, the wrong choices might make you suffer economic damage.
Fourthly, the percentage of contributions is different. In the case of a 401K, employees need to contribute a fraction of their salary into the plan. Accordingly, the employers need to partially or fully match those contributions. In fact, here matching funds can be considered a free additional payment to encourage the participation of the program. In fact, few workers can’t refuse the free money like that. As an added bonus, employees don’t need to pay tax for that amount of contributions until they become a pensioner. But a 401A plan requires no contributions from employees at all. Instead, the employer has every right to decide who the recipients are and how much they get. Just mentioned above, not all employees are eligible for that welfare.
Fifthly, the degrees of compulsion between them are different. Typically, as for a 401(a) savings plan the employers possess the initiative, which means that they set the mandatory levels on the contributions, including the salary deferrals if any. Since it is mandatory, that often means the recipients have no choice but acceptance. But why not accept it? This is so good a thing. With a 401(k) plan, you have to decide for yourself how much you should set aside for the retirement plan. This is an art of balance: you need to defer as much money as possible from your wages while it won’t lower your current material living standards, life satisfaction, and levels of happiness. Of course, it is up to you to be bitter first and sweet later or the opposite.