General impressions of 401(a) plans, please? Generally good, very good, not so good, really depends? I am googling a lot; reading sections of the Internal Revenue Code and interpretations; etc. trying to get a handle on these. I have the proverbial "friend" whose employer (a state) requires participation. The question is how much more saving he should do for retirement, in view of the income he will get from this pension plan.
In particular, I am interested in
--whether cost-of-living adjustments tend to be "generous." If one can generalize about this...
--whether payments (while in retirment) from the 401(a) tend to set off the social security taxation trap (whereby having too much income from sources such as a Traditional IRA can launch one into an absurdly high tax bracket for SS benefits).
I googled as well. If only because you surprised me with a plan I never heard of, I don't recall this ever mentioned in the CFP section on retirement. After the google, I don't understand the rest of your question. It seems to be close to a 403(b) which is close to 401(k). Investments inside the wrapper can be mutual funds just like the 401(k) so your reference to COLA confuses me, as well as the question about avoiding the SS tax trap, the withdrawals from this account are still taxable. If you find specifics, I'd be curious to see details. I suspect much of any good reply will be based on how the account is run. What funds at what expenses are offered? What is the employer match?
Maybe I'm not following the right set of numbers and letters, but I thought a 401(a) was simply the part of the revenue code that allowed for employer profit sharing plans.
Profit sharing plans are sometimes included along with a 401k, 403b, etc and count towards the maximum annual combined contribution of $45k (this year). Employers may make contribs to employees accounts on a non-discriminatory basis and the amount can increase or decrease annually (hence the "profit sharing").
Around here (my area of the country) these 401a plans are the State Retirement Plans - usually a defined benefit pension plan. Usually very good... employees required to pay in 6% or so of pay, employer matches, and ultimate benefit is based on years of service, average compensation (definition varies by plan), etc. And retirees get COLAs every year. All in all a great retirement plan. But there's a lot more to it and I grow weary already.
As far as I know, you're exactly right and they are often simply not *referred* to as 401(a). It's an odd accident of history that the 401(k) is referred to by that cryptic name rather than something like ERAs ("Employer Retirement Accounts") or whatever.
Look for things like "Money Purchase Plan" for example. An employer may provide one (as did my previous employer), without ever referring explicitly to the part of the code which allowed the existence of the plan.
Google for Money Purchase Plan. The first hit is the IRS web page about them.
Thank you for checking. I am going strictly from what google turned up. A search offered few sites like those at say fairmark.com or motleyfool that often provide pros and cons. This newsgroup's archives also have few references to a
401(a).
I was not sure whether the 401(a) was strictly an annuity or just "seemed like" an annuity. I think the right answer is that the 401(a) is the closest thing to a /traditional/ pension plan available for many government employees today. In fact, one site said the 401(a) is often considered synonymous with a "fully funded pension plan."
The 401(k) and 403(b) are also said to be "pension plans," but are newer options for the employee, options where he/she has more say over how his/her money is invested and doled out.
Wikipedia eventually offered some further insight (many here mention this): The 401(a) is a "defined benefit" retirement plan. The 401(k) and 403(b) are "defined contribution" retirement plans.
With the 401(a) and other(?) defined benefit plans, the employee does not have an individual account but rather pools his/her money with others such that his/her "investment" cannot be precisely tracked. Estimates of what
401(a) covered employees will receive in retirement are generally available, much the same as the Social Security department blah blah provides estimates to the public these days of what SS will pay. A board manages the investment selections of a 401(a).
Evidently increases in retirees' 401(a) pensions are fairly usual. The "catch" is that the increases are not based on any conventional COLA formula. Instead, increases are based on the performance of the 401(a)'s holdings (that is, the holdings for all the employees covered by the plan). I guess this method of "adjustment" may be good or bad, in the same way COLA may be good or bad. Neither necessarily denotes what is happening in one's personal life as far as increases in personal cost of living are concerned.
The 401(a) plan on which I finally got some specifics invests something like 75% in stocks 'and similar' and 25% in bonds. For a good example, see
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. Wading through all the FAQs at this site helped a lot. Interestingly, if one is an Arizona state employee, participation in this plan is mandatory. This almost makes moot the question of running the numbers and seeing if the amount the state of AZ requires would have paid better if put elsewhere for retirment.
I guess a retiree with 401(a) payments has to deal with the trap you describe at your site just as someone taking withdrawals from his/her Traditional IRA does.
My sense is the 401(a) is better than a 403(b) in that, for one, employees often pay ridiculous fees for the 403(b) annuity.
I googled with a few states' names and "401(a)" and found it seems pretty common.
It seems that an employee with a 401(a) plan generally should not count on it exclusively. At least, in Arizona, the 401(a) pension does not come close to one's salary.
I would still be interested in general impressions of these plans and how to incorporate them into one's planning. I think I am on the way to answering this, but a double check--general comments on--by any folks having experience with these is welcome.
My state, Alabama, has the RSA-1 for gov't employees, which is similar to a the defined bene plan that Skip mentioned above. I can't speak for all states but for us the COLAs are entirely dependent on state legislators. If the legislature approves a 5% cost of living increase for gov't employees, those receiving benefits also get the increase.
Sometimes they go a handful of years before approving an increase, but then will make a large increase all at once. For instance I think our last approved COLA was 7%. Disclaimer: we do alot of things backasswards down here.
My mistake. A 401(a) may be EITHER defined benefit OR defined contribution - or both. 401(a) is merely a section of the tax code which describes the requirements for a retirement plan in general. As I said elsewhere, a typical "money purchase plan" is a defined contribution plan organized under 401(a). There are other pension setups which are also organized under 401(a) and they may be *either* defined benefit or defined contribution.
401(a) mostly talks about things like a plan not being top-heavy (ie. favoring highly-paid employees) and other qualification details like that.
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