Both of these savings plans are workplace retirement plans, included in the 401 section of the Internal Revenue Code. 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.
What Is a 401(a) Plan?
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 are only 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.
What Is a 401(k) Plan?
A 401(k) plan, usually offered by private-sector employers, allows an employee to invest pre-tax dollars from his paycheck into retirement-account funds. The percentage amount is determined by the employee, and some companies provide a matching program, although this is not a requirement.
What Are the Key Differences Between a 401(a) Plan and a 401(k) Plan?
Along with the public-versus-private sector difference, there are a few other key distinctions:
- While participation in a 401(k) plan is not mandatory, a 401(a) plan 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.