Recently employed as a civil servant or government employee? Congratulations—you’re likely eligible for a 401(a) plan! What is a 401(a) plan? It’s very similar to a traditional 401(k) retirement plan, with the caveat that it’s specifically available to government employees and, occasionally, nonprofits. 

If you work in the public or nonprofit sector, it’s important to take full advantage of a 401(a) plan if offered one. These are powerful investment vehicles that add up to significant retirement savings over time with continued contribution. Here’s what you need to know about 401(a) plans, how they work and what makes them unique. 

The Basics of a 401(a) Plan

A 401(a) plan is an employer-sponsored cash purchase retirement plan. That means employees, employers or both can contribute. Employees usually have the option to contribute a fixed dollar amount each pay period or a percentage of their salary on a recurring schedule (no more than 25% of total salary). Employers also have the ability to match payments up to a certain level, although it’s not required. If they do contribute, employer contributions are spread over a vesting schedule tied to an employee’s years of service. 

The major way 401(a) plans differ from other types of qualified retirement plans is in employer control. Where 401(k) plans allow employees to control things like allocation, 401(a) plans give this control to the employer. Moreover, employers can actually tailor 401(a) plans for specific employees! This allows them to structure different contribution benefits and structures befitting different service tiers or tenures. 

While retirement accounts in general are a great perk, the customized nature of 401(a) plans makes them especially attractive. Employers can use them to attract and retain talent, and employees can bargain for different terms when seeking employment. This level of flexibility isn’t possible with a 401(k)—especially across different employees. 

Finally, there are stipulations to who can own a 401(a) plan. Employees must be 21 years of age and have at least two years of service at the company. This is in contrast to a 401(k) program, which only requires a year of service. 

Opportunity For Collaboration?

Thanks to the highly customizable nature of 401(a) plans, there’s an opportunity for employers and employees to discuss them openly. For employers, these accounts are a talent retention tool and a way to reward career longevity. For employees, they’re a reason to stick around and grow at the same company, while ensuring a healthy retirement. 

Employers and employees should speak openly about the structure and stipulations of a 401(a) plan. Topics like contribution match, vesting schedule, allocation and more are all important matters to both sides. Finding common ground on them is a great way to create a plan that benefits everyone.

Contribution Requirements and Stipulations

One of the major differences between 401(a) plans and 401(k) plans is in contributions. 401(k) plans are entirely optional; 401(a) plans may be mandatory. Once again, it depends on the employer’s criteria. There are several ways employers can stipulate contributions:

• Employees have the option to make contributions
• Employer match is contingent on employee contributions
• Employees are required to contribute a minimum amount

Whether contributions are voluntary or mandatory, an employer decides whether they occur pre- or post-tax. This can significantly impact the growth of the fund over time. For example, employees may prefer a pre-tax contribution that lowers their taxable income for the year. Likewise, some might prefer a post-tax contribution so they can withdraw in the future without incurring higher tax rates. 

Vesting and Withdrawals for a 401(a) Plan

Speaking of withdrawals, things become a bit more complicated with a 401(a) plan, as opposed to other common investment vehicles. Contributions vest as soon as they’re made; however, employer contributions are subject to vest depending on the schedule for that specific employee. There’s a 10% IRS penalty for early withdrawals before age 59½. Like other retirement plans, this penalty doesn’t accrue if the employee becomes disabled, dies or rolls the funds into another qualified retirement plan.  

How to Build Wealth Using a 401(a) Plan

The best way to treat a 401(a) plan is like you would a 401(k) plan. Keep contributing consistently month over month, to take advantage of dollar cost averaging and compound interest. Moreover, contribute as much as your employer will match!

If you’re given the opportunity to negotiate the terms and stipulations of your 401(a) plan, decide what aspects are most important to you:

• Employer match percentage
• Pre- or post-tax contributions
• Employer contribution vesting schedule
• Fund allocation and management

While many employers will likely have a stock plan they offer to employees based on position or tenure, it’s never a bad idea to negotiate these items if possible. If these items are non-negotiable, focus on contributing as much as possible for as long as possible. Let the markets do what they do best!

Explore the Benefits of a 401(a) Plan

What is a 401(a) plan? If you work as a civil servant or in the public sector, there’s a good chance you’ll become acquainted with this type of retirement account. While similar to a 401(k) plan in form and function, it’s important to understand that it’s an employer-controlled type of account. That said, they’re highly customizable and can be a great asset to employees who rack up many years of service. 

If you are looking to retire on your own terms, sign up for the Wealthy Retirement e-letter below. This daily newsletters provides daily retirement strategies, passive income tips and much more.

If offered a 401(a) plan, take a moment to understand its structure and the opportunities it offers. With consistent, long-term contributions and a strong employer vesting schedule, it has the power to help you build wealth for the long-term: retirement and beyond.