401(a) vs. 401(k): What's the Difference?

Traditionally, American workers relied on what was called the three-legged stool of retirement income (workplace pension plan, Social Security payments, and personal retirement savings). But employers have largely abandoned pension plans, replacing them with workplace-sponsored retirement savings plans like 401(k)s and 401(a)s, to name two examples.

Both of these savings plans are workplace retirement plans, included in the 401 section of the Internal Revenue Code. They are, in essence, tax codes. The difference between a 401(a) plan and a 401(k) plan is first in the type of employer offering them and then in certain details and provisions.

A 401(a) plan is a money-purchase retirement plan normally offered by government agencies, educational institutions, and non-profit organizations rather than by corporations. These plans are usually custom-designed and can be offered to key employees as an added incentive to stay with the organization. The employee contribution amounts are normally set by the employer. The employer has a mandate to contribute to the plan as well. Contributions can be pre- or post-tax.

The sponsoring employer establishes the contribution and vesting schedules, and these can be set up in a way to encourage employees to stay with the organization. If employees leave, they can often withdraw money by rolling it over into a qualified retirement savings plan or by purchasing an annuity. Participation is often mandatory, as are employer contributions. Investment options are easily limited by the employer, and government-sponsored 401(a) plans often offer only the safest investment options. Education employers are sometimes offered a related plan called a 403(b) plan.

A 401(k) plan is usually offered by private-sector employers. It allows an employee to invest pre-tax dollars from his or her paycheck into retirement savings account funds. The contribution amount is determined by the employee and, while some employers provide a matching program, this is not a requirement and many do not.

The employer offering the 401(k) plan selects which investment options are available to the participants, though as a function of their fiduciary duty, they need to be careful to offer participants a wider range of options than sponsors of 401(a) plans often do. Employers typically offer around 15–30 investment options, though that number has trended down in recent years, as research has indicated that too many options confuse participants. Assets in a 401(k) plan accrue on a tax-deferred basis, though they are taxed at regular rates when they are withdrawn.

• 401(a) plans are generally offered by public employers and non-profit institutions. 401(k) plans are usually offered by private sector employers.
• While participation in a 401(k) plan is not mandatory, with a 401(a) plan, it often is.
• While a 401(k) plan allows for the employee to decide how much he wants to contribute, the contribution amounts and levels of a 401(a) plan are set by the employer.
• A 401(k) plan offers the employee a range of investment products, while a 401(a) plan gives more control to the employer regarding investment options, which may be more limited in terms of risk.