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

kids in jail

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!