Maximizing your employer-provided investment benefits is critical if you want a comfortable, enjoyable retirement. But how do you do that? It requires a deep understanding of your employer’s exact investment offerings—in most cases, a 401(a) or a 401(k) plan.
Though both of these allow you to sock away cash for your post-work days, the plans diverge in many major areas. Let’s take a detailed look at how each one works.
If you work for a private company, then you’ll likely have a 401(k). Easily the most popular type of retirement plan out there, 401(k)s allow you to contribute as much of your pre-tax earnings as you’d like (up to the legal threshold, of course). In some cases, your employer may also provide a matching contribution—usually a percentage of your salary or your own personal contributions.
401(k)s are open to all full-time employees and come with a number of investment options, including both conservative and more aggressive ones. You can usually choose between several options or divide your contributions evenly among them.
The IRS sets the maximum contribution amount at $19,000 for 401(k) plans. Participating employees over 50 can contribute an extra $6,000 in catch-up contributions.
Pros of 401(k) plans:
- Uses pre-tax earnings
- No required contribution amount
- Open to all full-time employees
- Offers a variety of investment options
Cons of 401(k) plans:
- Doesn’t require employee matching
- Maximum legal contributions are much lower than 401(a) plans
401(a) plans are reserved for employees of public organizations, like governmental agencies, educational institutions, and non-profits. They’re less common, and they’re usually not open to all workers—just a select few. They’re often used as a perk to keep high-ranking employees around longer.
On 401(a) plans, employers must make a minimum annual contribution. Eligible employees are usually required to participate, and their contributions are often set by the employer. Investment options for these contributions are typically limited because most public entities choose only the safest, most stable investment vehicles available.
Another big difference in the battle of 401(a) vs. 401(k) plans is where the contributions come from. Though 401(k) contributions are made out of pre-tax earnings, this isn’t always the case with 401(a) plans. With 401(a) plans, the employer decides whether pre-tax or post-tax dollars can be used (and in most cases, it’s post-tax).
Though the IRS sets the legal contribution limits for 401(a) plans ($56,000 annually), employers can set their plan’s maximum threshold lower than this, if desired.
Pros of 401(a) plans:
- Employers are required to contribute
- Higher maximum contributions than 401(k) plans
Cons of 401(a) plans:
- May use post-tax earnings
- Contributions are usually set by the employer
- Only available to certain employees
- Investment options are limited and non-aggressive
Maximizing Your 401(a) or 401(k)
If you’re not sure what your employer-provided retirement plan is, check with your human resources department or refer back to your initial hiring paperwork.
Once you know what plan you have, you can maximize your benefits by following these tips:
- Keep your contribution limits in mind - Be aware of how much you’re allowed to contribute each year (both by the IRS and your employer), and get as close to that number as possible—especially if it’s coming from pre-tax dollars.
- Max out the match - You should always contribute enough to max out your employer’s matching contributions. If your company will contribute up to 3% of your annual salary, then put in 3% if you can afford it.
- Leverage catch-up contributions - If you’re over 50 and have a 401(k), you can contribute $6,000 more per year than other employees. You should start leveraging these catch-up contributions as soon as you’re eligible.
- Customize your investments - If you’re further out from retirement, being more aggressive in your investments might be a good move. If you’re closer to leaving the workforce, diving into safer funds is probably your best bet. Customize your investment vehicles based on your goals and your timeline.
- Minimize your fees - Take a careful look at the fees you’re paying for your investments. Actively managed funds will cost you more than index funds, so choose your investment vehicles accordingly.
- Sit down with HR - With 401(a) plans, your company (and your HR department) have a lot of control over your retirement options. Schedule a meeting to talk about the ins and outs of your plan, how you can maximize your earnings, and what you can expect for your plan in the years to come. Voicing any concerns you have with the plan might also help if you expect to stick around a while.
The bottom line is simple: Both 401(a) and 401(k) plans can be valuable tools in the journey toward retirement, but understanding how your individual plan works is critical to maximizing your savings.
Confused about what plan your employer offers? Not sure if you’re leveraging it to its fullest? Don't be afraid to ask questions. It’s never too late to start, so you can enjoy your retirement to its fullest.