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401k vs 401a


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9 replies to this topic

#1 jomom

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Posted 02 March 2003 - 03:09 PM

I am currently enrolled in Mississippi's PERS (Public Employees Retirement System). I believe it is a 401a plan. Our city is attempting to privatize all public works operations, which would likely mean a 401k plan under a contractor. Our wonderful city manager is telling us that our benefits will be just as good. Can someone briefly describe the differences in a 401a vs 401k? Are 401a plans "safer" or guaranteed in some way? Which is better? Thanks in advance!!

#2 FAPInJax

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Posted 03 March 2003 - 09:08 AM

Generally, a 401a plan is employer funded (profit sharing plans, etc.).

A 401k plan has employee contributions and the employer can match some or all of those contributions.

Neither one is safer or guaranteed more than the other.

#3 pax

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Posted 03 March 2003 - 10:34 AM

In general, a 401(k) is a feature of a 401(a) plan. The "k" feature is merely the particular provision that permits employee contributions on a pre-tax basis, but it is already included in an "a" plan.

#4 MGB

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Posted 03 March 2003 - 10:58 AM

There may be considerable safety differences, although subtle and difficult to summarize.

The 401(a) plan offered by the governmental employer is not subject to Title I of ERISA (a federal law that does not apply due to states rights issues). Instead, the plan is subject to state law, which varies considerably from state to state. Title I of ERISA generally covers vesting, fiduciary actions (e.g., choice of investments), disclosures, and other participant-protection issues. A state may have very strict standards similar to, or exceeding, the Federal rules. However, usually states are not as strict. For example, they typically have much looser vesting rules, so you are not as quickly vested in the employer contribution as you would be under an ERISA plan.

The private employer offering a 401(a) with or without a 401(k) feature, will be subject to ERISA. Therefore, all of the fiduciary, benefit protections and disclosure provisions of the Federal rules apply.

As far as whether the "benefits will be just as good," that all depends on what benefit provisions the private employer incorporates in their plan (if they offer a plan at all). If the 401(a) plan produced a 6% contribution by your employer and the private employer's plan only produces a 4% contribution by the employer, it is obviously not as good.

#5 jomom

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Posted 03 March 2003 - 10:49 PM

Thanks for your replies. As far as contributions go, PERS of Mississippi contributes 9.25% of your gross income, the employee contributes 7.25%. I have heard people say that a 401k plan "matches" what the employee puts in. So as far as contributions go, PERS sounds better. I just thought that since PERS is a state retirement system, maybe funding was provided by tax money or bonds. I thought maybe this was less vulnerable to stock market fluctuations? I honestly don't know diddley about all of this. I just got very interested, with the possibility of my current work benefits being in jeopardy.

#6 MGB

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Posted 04 March 2003 - 09:56 AM

The match on the 401(k) is completely up to the plan sponsor. They may match some or none. The most common match is 50% of the first 6% of compensation that you contribute, which means a maximum of 3% of compensation they will contribute. They may also have additional contributions not associated with a match, although this is not as common. Every plan is different.

Also, every plan is different in the investment options offered. There is no way to make generalizations of the nature of the PERS investments versus a private company's 401(k) investments without knowing what the specific options are.

Also note that your PERS "may" be a Social Security replacement plan. I.e., you are not contributing to, nor will you get Social Security benefits because you are a governmental employee and covered by the PERS. (Not all governmental plans are this way - do you pay 6.2% of your salary to SS?).

If that is the case, you will now start paying into Social Security and receive SS benefits.

#7 jomom

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Posted 04 March 2003 - 07:39 PM

I looked at my W2 from last year, I am paying into both SS and PERS. So I guess that's a good thing. What about the funding of a PERS. Was I way off in thinking that PERS may be "safer" in that tax money or bond money was used? I've requested info from them, have yet to receive it.

#8 MGB

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Posted 05 March 2003 - 09:57 AM

Generalizations will not work on safety of investments. PERS plans invest in the same risky investments that all retirement plans do.

I just looked at the Mississippi PERS webpage. You are not in a defined contribution plan. That means that your contributions are not invested in a fund that you will specifically see produce a payment in the future. Instead, it is a defined benefit plan. The amount of benefits that will be paid by the plan is determined by a formula and has absolutely nothing to do with the investments of the plan.

The statement that a private 401(k) is anything close to resembling what you have now is disingenuous and an outright misrepresentation. There is no way that a 401(k) from a private employer will be anywhere near as generous as the PERS defined benefit plan. I guarantee that one of the reasons for privatizing your work is to save money by not having you in the expensive plan that you are in now.

#9 pax

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Posted 05 March 2003 - 08:56 PM

MGB is 100% correct.
Holy cow! the Mississippi PERS provides an incredible benefit. Where do I sign up?
http://www.mississip......state.ms.us/

#10 jomom

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Posted 07 March 2003 - 09:56 PM

Thaks fellas! That's basically what I wanted to know. I really appreciate your time!