Many doctors and other people working for public employers (including my own sibling) have never heard of a 401(a) when they start working for their employer. The more well-known 401(k) is actually a type of 401(a). I write the letters in parentheses because they actually refer to section 401 of the IRS code under subsections (a) and (k). Other retirement plans like 403(b)s and 457(b)s are similar. In actual practice, however, most people consider 401(a)s and 401(k)s to be two different beasts.
401(a)'s Are Mostly For Government Employees
401(a)s are generally offered to government employees. In my family member's case, it was to replace a previous true defined benefit pension plan. The municipality he works for decided to have the employees rather than the municipality run the investment risk, so he gets a 401(a) instead of a pension. The municipality still puts a significant sum in there each year, so in many respects, it's still quite a good retirement plan. It was interesting to see how the paperwork described the contributions to the plan. The plan required the employee to make a mandatory contribution of 8% of his salary, then matches it with 5% of his salary. In addition, it claims that it is also putting in another 17% of his salary into a fund to pay for his retirement health plan, health reimbursement account, death and disability, and “unfunded future liability.” Okay, whatever.
There are no voluntary contributions into his particular retirement 401(a) account (although there is a 401(k) and a 457 as well), so it's all employer money (plus the mandatory employee contribution, which is essentially the same thing.)
Many doctors, including those working at the local university, are offered a hodgepodge of retirement accounts including a 403(b), a 457(b), and a 401(a).
ERISA Doesn't Apply
The set-ups above are fairly typical for a 401(a). A 401(a) isn't generally covered by Title I of ERISA, so the employer gets to make the rules. Remember that the point of ERISA is to protect the participant. It covers things like vesting rules, fiduciary actions like choice of investments, and disclosures. Instead, 401(a)s are regulated by state law, which is usually not as strict. So you can assume it will take longer to vest in your benefits (5 years in my family member's case), the investments won't be as good (read higher expense ratios), and they won't tell you what the fees are (I couldn't find them for his plan anywhere on the web.)
Four Different Types of 401(a)s
401(a)s can have significant variation. Four types are commonly seen.
401(a) Type 1
In this 401(a), the employee does nothing and the employer makes all of the contributions. Think of it as a pension but the employee is running the investment risk.
401(a) Type 2
In this type, all employees contribute a set percentage of their pay. Think of it as your salary being permanently lowered in order to fund the 401(a).
401(a) Type 3
Unlike the first two types, in this type of 401(a) the employee actually gets a choice, although this irrevocable decision must be made when the employee first becomes eligible for the plan. You can choose not to participate at all, to participate with a low percentage of your pay, or to participate with a relatively high percentage of your pay, but whatever you choose, you're stuck with it as long as you work there. Choose carefully my friends! It's kind of unfortunate because most people can save more in later years once they've beefed up emergency funds, paid off student loans, gotten into their dream home etc. But in this case, you're probably best putting in the maximum and delaying some of your other financial goals if necessary.
401(a) Type 4
A less common option is a 401(a) plan that allows after-tax employee contributions. The nice thing about this type of plan is that you can change your contributions from time to time in whatever way you want. The downside is that the money is after-tax. It's neither tax-deferred nor Roth. No tax deduction for you like with a tax-deferred account. No tax free earnings lie with a Roth account. You often can (and should) do a Roth conversion with the money. In this respect, it's a lot like Mega Backdoor Roth IRA contributions into a 401(k).
Contribution Limits
When talking about employer provided retirement accounts, there are two contribution limits to think about. The first is the “employee deferral contribution limit”, sometimes called the 402(g) limit. This is the amount an employee can put into a 401(k) as a tax-deferred or Roth contribution. An employee shares this limit across all employers and retirement plans they are eligible for. For 2023, it's $22,500 for someone under 50 ($30,000 if 50+). Contributions to 401(a) accounts, like contributions to 457(b) accounts, do not count toward this limit at all.
The second limit is the “total contribution limit”, also known as the 415(c) limit. This is the total of all employee contributions (whether tax-deferred, Roth, or after-tax) and employer contributions (whether match, profit-sharing, or penalty). This limit is not shared across plans offered by unrelated employers. That's why many doctors can use multiple 401(k)s. All 401(a) contributions count toward this limit. For 2023, this limit is $66,000 for someone under 50 ($73,500 if 50+). 457(b) contributions do not count toward this limit either.
Interestingly, if your employer offers a 401(k) and a 401(a), the two accounts share this same limit. If your employer offers a 403(b) and a 401(a), the two accounts EACH have a separate $66,000 limit. Quirky, but I don't write the rules.
Contributions Usually Not Optional
Mandatory contributions are not necessarily a bad ting. Frankly, I think this is probably a good idea, since most people don't save if they're not forced to, but it does limit your financial flexibility. The good news is my sibling belatedly realized he actually has been saving over 15% of his income toward retirement without even realizing it. Between his 8% mandatory employee 401(a) contribution, the 5% employer 401(a) match, the 2% 401(k) match, and his own voluntary 401(k) contributions, he was actually saving quite well for retirement.
You Get Control
Unlike a pension or defined benefit plan, you get to control the investments in a 401(a), just like a 401(k), 403(b), or 457(b). So you can choose the lower cost index funds in the plan and work around any plan limitations using other available retirement accounts such as Backdoor Roth IRAs.
Beware the Fees on 401(a)s
Beware of these cousins as well as fees
Now the bad news. My sibling was surprised to learn he had an investment adviser he was paying. His fees for the last quarter were $60 (50 basis points). That's not too bad….except all it seems like the adviser has done was pick a few funds in the plan and put the money into them. Even that is probably worth the $60, except the asset allocation made no sense at all. The two biggest components were a Russell 3000 Fund and an S&P 500 Fund, which have a correlation of approximately 0.99 between them. The remaining funds were a hodge-podge of actively managed funds. He was surprised to learn his asset allocation was 95% stock, which worked out pretty well since the years he had been working for the employer and investing (without his knowledge that he was investing) were during a pretty good bull market. In a few minutes, I had made him $240 a year by firing his adviser and putting him into a reasonable asset allocation of funds. I told him $240 is better than a kick in the teeth but was nothing like the $15K a year I saved my parents by helping them see that their adviser and his fees were having a rather negative effect on their retirement investments.
More good news for my sibling was that it turned out somebody at his HR department seems to have their head screwed on right since the actual plan fees (in addition to the ERs) are just 11 basis points plus $35 a year. Almost all of his expense ratios were under 0.20% a year, with the exception of the small-cap fund, an actively managed international fund, and a socially-responsible fund, but even those were under 0.75% a year. It's not quite the Federal TSP, but it beats the pants off 99% of the 401(k)s out there.
What Should You Do With Your 401(a)?
As a general rule, these are great retirement accounts and you should max them out. Choose low cost investments in them in accordance with your overall written investment plan. If you have the first or second type of plan, you don't have to do anything as far as deciding how much to contribute; your employer has already made that decision for you. If you have the third type, choose to max it out as that will be your last opportunity. If you have the fourth type and have already maxed out your other retirement accounts, max it out too and do a Mega Backdoor Roth IRA conversion with it.
Do you have a 401(a)? Which type? How is it? Sound off in the comments section!
My employer offers a 401a and they contribute up to $50,000 per year, which I am able to get. The investment options are limited, but still ok. They are mainly target date accounts with an EF of 0.4% (was 0.7% up until recently). There are a few index funds, which I use with EF of 0.1-0.2%. I use these with some other accounts I contribute to (a 403b and 457) to keep my asset allocation where I want it. It does a period of vesting, which is 5 years. So most of my colleagues are pretty committed to atleast 5 years here. And I would agree that my investment options are much better in my 401a than the 403b I have.
As a resident, I had access to a 401(a) as well as a 403(b) and 457. You could contribute to all 3, meaning we had access to HUGE amount of tax advantage space (though I made less then the contribution limits). Also, the 401(a) could be pre- or post-tax, which was awesome as a resident.
All contributions were voluntary and we received no match. The fees were excellent (not VG excellent, but close) and there were ~220 funds including VG, fid spartan, and DFA.
I think I am lucky with my 401(a). I work at a university hospital and like John have access to a 401a, 403b and 457b. Employer contributes 12% of salary (up to max limit; 255k for 2013) to 401(a) and immediately 100% vested. Plan is with Fidelity but all but one of the index funds are Vanguard. Decent selection to build a nice portfolio. ERs are btw 0.05% and 0.18%. Have access to a self-directed brokerage acct if I want too.
I’ll let you know the details when I’m eligible to participate in a year, but my new private practice group’s plan is a 401(a). They said I’m free to direct the money to whichever financial institution I want and manage it however I want. I called the TSP and they said I couldn’t contribute it directly to them, but could roll the money over to them as often as I want.
I’ll be starting residency this year (5 years) and was getting a head start on looking over the different benefits from which I’ll need to decide. My residency offers the 401a, 403b, and 457. I was wondering if someone could give a quick rundown (or direct me to somewhere) of the advantages/disadvantages of each, or which I should use, and what I can eventually do with them as far as converting to a Roth or other retirement account. Thanks.
You don’t have a choice with the 401a, so don’t worry about it. If there’s a match with the 403B, you’ll want to make sure you get that. Then, use a Roth IRA and if appropriate, a spousal Roth IRA. If you’re maxing those out and want to save even more, see if there is a Roth option in the 403B. If so, use that. If not, just use the 403B and convert it to Roth the year you graduate residency. If you’re maxing out Roth IRAs, and a 403B, then consider the 457. But really, who are we trying to kid? As a resident you’re doing well to get your 403B match and max out a Roth IRA.
Current gig: 403(b) with match up to 5% for my age group, and a non-matched essentially 457 option.
New gig: 401(a) with mandatory 5% employee contribution, 10% match up to IRS compensation limits ($260k for 2014), along with non-matched 403(b) and 457 options.
I’ll be able to hit the IRS tax deferred limit thanks to that 10%ish match, and plan on adding back door Roths for the wife and myself to diversify a bit and sock away a little extra.
Oh, and all of these plans have Fidelity, Vanguard, TIAA-CREF or at least one of the first two as options. I haven’t been able to find expense ratio information but I imagine it will be reasonable for a Vanguard index fund.
WCI,
I’m not sure I understand the limits on the 401(a) contributions. Bryan mentioned that his employer contributes 12% of his salary up to 255K (30,600$). Is that in addition to the 403b contribution limit of 17.5k? How much total can be contributed to the 401a, 403b, and 457?
Thanks, Ben
All have different limits. A 403B generally has a $17.5K limit (plus match), a 457 generally has a separate $17.5K limit, and a 401a has a limit determined by your employer. I’m not sure how high that can go to be honest.
My wife’s employer allows employees to select their contribution amount into their 401A, but requires the contribution be after-tax dollars. We have significant retirement savings in other accounts (traditional and Roth IRAs and 403Bs), and would like to know if withdrawing her after-tax contributions from this account can be done without penalties, fees, or additional taxes.
What does the plan document say? Most 401(a)s are pre-tax, so yours is somewhat unique already.
I’m at a state hospital and have the following options:
– 401(a) with 5% employee contribution and 10% employer contribution up to current IRS limit ($260,000 unless one has been in this plan continually since 1996, iirc)
– 401(k) and 403(b) sharing the same pre-tax pot, no match–I chose the 403(b) arbitrarily
– 457 with its own pot, no match
All of these options offer choice of Vanguard, TIAA-CREF and Fidelity. Funds in each are at market rates if not better (ie, no minimum for Spartan shares with Fidelity).
As one can see, I have a lot of pre-tax space in which to play. There’s also a high deductible insurance option with associated HSA for those wishing to completely maximize that space.
Sounds like a pretty good set-up, much better than average.
I’m finishing up residency, where I have a 401(a) with 7.5% employee contribution pre-tax, no match, with Fidelity and various fund options. I also moonlight where there is a 457 with 4.5% pre-tax employee contribution, 3% match, managed by Great-West, INVESCO stable asset fund.
New employer has a state pension, 6.5% employee contribution, vested in 5 years, pension formula of 2% at age 62 of final salary (capped at $136k annual salary), where I can potentially get $90k annually if I retire at 62. They offer a 401(a) which is solely employer funded, I’m unsure of the % they use for the contribution, with annual limit $53k. They also have a 457 that is solely employee contributions, pre-tax or after-tax, annual limit is $18k. Both 401(a) and 457 are managed by VALIC or Nationwide.
I’m leaning towards rolling over my current 401(a) and 457 funds over to the new employer’s 457 vs only rolling over the 457 and keeping the 401(a) where it’s at. Starting salary is $256k
A 401(a) with Fidelity seems more attractive to me than a 457 with VALIC or Nationwide, but the devil on this sort of thing is all in the details. You need to dive deep into the plan documents of all four plans to decide what to do. May also be worth paying for some hourly advice about this decision.
WCI,
I’m a bit confused and hope you can provide some assistance.
I currently work at a state hospital working per-diem and they offer a DCP (401a), 403b, and 457 plan. I am also working at another place that I contribute to my 403b and maximize that yearly ($18k).
At the per-diem place that I’m working, the DCP (401a) is a mandatory contribution at 7.5% pre-tax of employee salary.
Question: Does the 401a contribution count toward the $18k yearly contribution limit of my 403b? I’m very confused on this. I get mixed answers and would hope you could provide some clarity. Thanks in advance for your input and thoughts.
The total of all 401a, 403b, and 403b contributions is $54K a year if you’re under 50. The total “employee” contribution you can make is $18K total in any combination of the two 403bs. The 457 has a totally separate limit of $18K. So if the state hospital puts $15K into your 401(a) and you put $18K into your state hospital 403(b), then you can’t put anything into the other 403(b). If there is a match in one of the 403(b)s, use that one preferentially. Likewise if one has much lower fees or better investments than the other.
This post may help:
https://www.whitecoatinvestor.com/multiple-401k-rules/
So I just started to work for a university hospital that forces us to pick an ARP (401a) or the State Teachers Retirement System plan. In the STRS you can pick between the defined benefit, defined contribution, or combined programs. This is all new to me. The ARP obviously provides a bit more flexibility but my employer only matches 9.5% instead of 14% if I choose the STRS. Also with the ARP you are immediately vested while the STRS vests 20% each year. Any thoughts would be appreciated as this is brand new to me. I’m used to my 403b with not many options. Thanks.
Tough choices. The devil is in the details unfortunately, and even then, there are plenty of assumptions that may turn out to be garbage in/garbage out. Obviously get the full match either way you go. If you’re not going to be there 5 years obviously go with the ARP. Otherwise, I’d think pretty seriously about the STRS with its higher match.
Thanks for the help. I would be curious to hear your general thoughts on defined benefit vs contribution plans vs combined plans?
Both have their pluses and minuses. Defined benefit plans put the risk on the employer, that’s not a bad thing unless you’re also the employer. Defined contribution plans allow you to be more fully in control, but that also means the risk is on you. More risk and more reward as a general rule. If there is any chance your employer’s financial position isn’t very stable I’d go defined contribution every time. Otherwise, I think there is a role for both.
Can you still contribute to a 401a (currently with Bencor) if you’re no longer a government employee/your current employer doesn’t offer that option? If not, can you roll it into an IRA? If so, are there any repercussions? Thanks
Yes, I believe you can roll it into an without tax repercussions. It’s a very good idea to do so as soon as you’re allowed to do so which is usually after separation.
Why would you be able to contribute to it after leaving employment? No, you can’t do that.
what is the max for 401K for 2016 and 2017 for some body over 60 yurs
$24K employee contribution, $60K total for anyone over 50 years.
I understand that my 401k has a limit of $24,500.
I also have a 401a from my employer (I put in 5%, they put in 9%).
Question: Does the money in the 401a count against the 24,500 total of the 401k???
Thanks,
401(k)s have two limits- the employee contribution limit and the total contribution limit. If under 50, the limits are $18,500 and $55,000. If 50+, add $6,000 to both.
If the 401(a) is from the same employer, contributions don’t count toward the $18,500/$24,500 limit but do count toward the $55,000/$61,000 limit.
Hope that helps.
For clarity:
– wife has 401a at work (minor amount, certainly won’t hit 18.5K
– wife also gets 1099 side income from unrelated job.
– she has no other job, 401K, etc
Was hoping she could put as much as allowed into the 401a and essentially dump all/nearly all 1099 income into Solo401K. Does 401a count against 415c limits?
Yes, but she gets two 415c limits for the two unrelated employers.
https://www.whitecoatinvestor.com/multiple-401k-rules/
That is helpful, but a follow up.
Which contributions of the 401a count towards the $55,000/$61,000 limit? Is that my 5%, the match of 9% or both combined?
All of them.
I have been researching this question for a while, and I ran across an interesting post on the Bogleheads forum that is several years old but may help shed some light on this.
WCI and others… what do you think?
As posted by Beth, Mon May 05, 2014 11:04 am
(https://www.bogleheads.org/forum/viewtopic.php?t=138568#p2049294)
“I have a 401(a) and a 403(b). The 401(a) is for mandatory contributions only (money your employer contributes or money that your employer requires you to contribute). The 403(b) is for my elective contributions. I am able to put the maximum contribution into the 403(b) account (currently $23,000 because I am over 50).
According to TIAA-CREF, who is the provider for both accounts, although the total yearly contribution to both accounts is currently over the $52,000 allowed for employer and employee contributions combined in 2014, that limit is not applicable because the contributions to the 401(a) are mandatory. I got this in writing from TIAA-CREF because I was concerned about it and I asked them to have a supervisor review that advice (which they did). As long as my 403(b), where the contributions are voluntary, does not go over $52,000 in combined employer and employee contributions they said I am fine.
Based upon this, it seems likely that you should be able to contribute the maximum ($17,500 or $23,000) to your 403(b) even if you are making a separate mandatory contribution to your 401(a). However, I would confirm this with whatever company manages your retirement accounts and I would ask them to provide the advice in writing so that you can file a copy with your tax papers in case the IRS ever asks any questions.”
Interesting. I’ve never seen that before. Do you have any other source than someone on the phone at TIAA-CREF? I would have guessed that the total for both 403(b) and 401(a) would be $55K, but can’t say I’ve ever seen a definitive source stating that either.
I agree that most people are going to be able to put $18,500-24,500+ into the 403(b) and still be able to put substantial money into a 401(a) either way.
I think the key word is “elective.”
According to the IRS (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits):
Two annual limits apply to contributions:
1. A limit on employee ELECTIVE deferrals ($18,500 in 2018)
2. An overall limit on contributions to a participant’s plan account (including the total of all employer contributions, employee ELECTIVE deferrals (but not catch-up contributions) and any forfeiture allocations.) ($55,000 in 2018)
Two important points:
1. Only ELECTIVE employee contributions to a 401(a) count toward #1 and #2
2. All employer contributions (whether mandatory or elective) count toward #2
The Finance Buff agrees ???? ( see this comment thread –> https://thefinancebuff.com/401a-plan-contribution-limit.html#comment-22314)
One more interesting point on this topic… in doing my taxes this year… I notice that my employer does not report #2 (employer contributions to 401(a)) on my W2… so it does not get reported to the IRS. I researched this and from what I can tell there is no law specifying employers even have to report this information. ???? Any thoughts on this would also be appreciated.
Right, but I think the question here is whether the 401(a) limit is completely separate from the 403(b) or if both are combined to one $55K limit.
Employer and employee contributions don’t show up on the W-2 as income subject to federal income taxes, but the employee contributions do show up as subject to payroll taxes.
WCI,
I have an option to choose from MassMutual, AXA, VOYA, MetLife, Prudential, VALIC, and TIAA.
Which option would carry the least amount of fees? And/or which option would be the most beneficial?
Thank you.
You mean those are the available mutual funds? Just look them each up- you’re looking for commissions and “expense ratios.” But from first glance, TIAA seems most attractive out of those options. Kind of a nasty line-up though.
Alternate Benefit Program. It’s for the 401(a) options. And do you mean “nasty” as in Good or Bad? Thank you.
I meant nasty bad. I don’t know what you mean by “alternate benefit program”. I guess that’s just what they’re calling your 401a. But some 401as have a bunch of low cost index funds. It doesn’t look like yours does.
Switched from w2 to 1099 need advice on IRA 2018:
From w2 I had a 403 b plan, numbers are as follow
403b: 10k employee contribution
403b: 5k employer match
401a: 18k which was a special pay plan created by employer to pay vacation time
Quit the employer and Now working only as 1099 (taxes as s Corp)
I want to
-Put as much as possible in retirement funds to lower tax
-Max in Roth contribution
-Using FA for now but want to go independent
Question:
-does special pay plan 401a count toward the limit of 55k?
I believe the 401(a) has its own $55K limit, so it wouldn’t count toward your 403(b) limit. We’re pretty far off in the weeds here though, I’d definitely discuss with HR and since you have one, your FA.
Hi,
I would appreciate your input on this subject. About a year ago, I switched jobs and I’m thinking about rolling over my retirement accounts to the new one. I should be able to roll over my old 403b to my new 403b without any issue. But I am no sure what to do with my 401a from my previous employer. Can I roll this over to my new 403b? I have a 403b and 457 at my new job to which I am contributing.
Thank you so much of your time
Almost surely you will be able to, but it is plan dependent so ask HR.