Dave ZahllerRegional Vice President

Security Benefit

Why a 457 Plan may be the Right Choice for Your District

38-10710-01 2013/03/25

Introductions

Dave Zahller

Regional Vice President

Security Benefit

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• 457 Plans

• 457 and 403(b) Plans: Similarities/Differences

• Plan Administration

• Roth Options

Agenda

457 Plans

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457 and 403(b) Plans: Similarities/Differences

Plan Administration

Roth Options

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Political Subdivisions, “Governmental”– States– Cities– Counties– Special Districts– School Districts

457 PlansDefining the 457 Marketplace

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• A voluntary, supplemental retirement plan available

on a pre-tax basis through payroll deduction

• Like your 403(b) plan, is exempt from ERISA

457 PlansWhat is a 457 Plan?

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• Started by private letter ruling• 1973 - Lompoc, CA

• Section 457(b) implemented 01/01/1979 • EGTRRA of 2001 repealed the coordination of

403(b) and 457 Plan Salary Deferrals making it possible for school districts to implement 457 plans in addition to their 403(b) programs

• Known as “deferred compensation” because the employer retains ownership of the assets until distribution• Plan assets held in trust for exclusive benefit

of employee or beneficiaries

457 PlansHistory

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• Typically a “group” plan structure• Unlike “qualified” plans, a 457 plan has no age

requirements or penalties for distribution• May have a loan provision • Assets available at

• Retirement• Termination of employment• Financial Hardship

• Distributions taxed as “ordinary income” in the year of receipt

457 PlansFeatures and Benefits

Source: http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans

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• Schools districts may offer both a 457(b) and a 403(b)• Offering both allows employees to defer maximum

amounts into each plan• Defer up to $17,500 into a 457(b) and up to $17,500

into a 403(b) for a total of $35,000 (in 2013)• Age 50 catch-up is an additional $5,500 for a total of

$44,000 (in 2013)• Other catch-up provisions may be available

457 PlansFeatures and Benefits

Source: http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans

457 Plans

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Plan Administration

457 and 403(b) Roth

457 and 403(b) Plans: Similarities/Differences

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• A written Plan Document is required• 403(b) written plan is required - dated (or amended) on or after

January 1, 2009• Contributions are made with (employee or employer) pre-tax dollars

through payroll deduction • Contribution limits are the same

• 2013 limit is $17,500 or 100% of salary• Age 50+ catch-up provision allows an additional $5,500

• Loan provision available (by plan authorization)• Roth provisions were made available January 1, 2011 (by plan

authorization)• Employee must begin taking minimum distributions in the year that

they reaches age 70 ½ unless still employed

457 and 403(b) PlansPlan Similarities

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457 plans are typically “group” plans• Employer retains control of provider(s) selection and may

change providers at will, transferring plan assets to new provider

• Annuities and mutual funds (custodial accounts) are eligible

403(b) accounts have traditionally been individual contracts between the employee and provider• No employer involvement in supervising plan prior to

regulation changes in 2009• Annuities and mutual funds (custodial accounts) are eligible• Some school districts are adopting a group 403(b) structure

as a result of the 2009 regulations

457 and 403(b) PlansPlan Structure

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“Special” catch-up options• 457(b) catch-up may be used three years before

“normal retirement age” as specified by the plan• All unused amounts in prior years of eligibility, up

to an additional $16,500 per year for three

consecutive years• 403(b) 15 years of service catch-up maximum is

$3,000 per year to a life-time maximum of $15,000

457 and 403(b) PlansPlan Differences

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Hardship and emergency access to account assets• 457(b) terminology: “unforeseeable emergency”

• Taxable if pre-tax dollars• Clearly defined IRS guidelines

• 403(b) terminology: “hardship withdrawal” • Allowed only when all other resources have been

exhausted• May be subject to a 10% IRS early withdrawal

penalty• Taxable if pre-tax dollars

457 and 403(b) PlansPlan Differences

457 Plans

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457 and 403(b) Roth

Plan Administration

457 and 403(b) Plans: Similarities/Differences

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1. Pass a resolution establishing a 457(b) plan

2. Appoint a “Plan Administrator”

3. Establish plan administration procedures or delegate plan administration to a vendor providing investments

4. (Best practice) Educate your employees

Plan AdministrationImplementing a 457 plan

• Document must contain all terms and conditions for eligibility, benefits, limits, the contract’s availability under the plan, and time and form under which benefit distributions would be made

• Any changes and amendments to the plan or the way the plan is operated should be communicated to all participants

• Plan Documents are typically provided and kept up to date by the investment provider

Plan AdministrationWritten Plan Document

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Others ways of educating employees on the benefits of participating in a 457 plan• Work with provider(s) to structure quarterly seminars on

a range of retirement planning topics• Benefit fairs (providers participate)• Provide individual packets of information• Open enrollment (providers on-site)• District newsletters• Email• Website links

Plan AdministrationEducating Employees

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What is your district’s participation rate?• Prior to new regs (2008) typical rate was 33%• Average rate now 20%

• Economy• Employees with orphaned plans didn’t choose to continue

with approved providers

Why is a higher participation rate important?• Indicates compliance with Universal Availability rule• “Best practices” fiduciary responsibility is illustrated• Increased participation correlates directly to the ability of

employees to retire on-time, reducing costs to district

Plan AdministrationParticipation

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Controlling providers benefits your employees

Limit the number of advisors that have access to the district and its’ employees• Limit a maximum of three reps per provider• District policy should grant access to all sites as

approved by administration

Plan AdministrationProviders

457 Plans

Plan Administration

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457 and 403(b) Roth

457 and 403(b) Plans: Similarities/Differences

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457 and 403(b) Roth457 Roth

Effective January 1, 2011 Roth contributions are allowed within 457 plans

• Must be adopted by the Governing Board• Plan Document must be amended to include

• 457 Roth contributions are made after-tax• 457 Roth earnings are tax-deferred• Upon severance from employment, 457 Roth

distributions may be tax-free

Summary

• School districts can offer a 457 plan exclusively or in tandem with a 403(b) plan

• 457 Plan withdrawals are available to any time after severance from employment are never subject to the IRS 10% premature distribution

• If participants change jobs they have the flexibility to move their accounts into their new employers retirement plan or into an IRA

• ROTH option is allowed

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Summary

• Employees can defer the maximum elective deferral limits into both a 403 and 457 including catch up amounts

• Adding a 457 option is an attractive recruiting tool for all potential employees

• 457 plans have no universal availability requirements, which is very different from a 403(b) plan. This can help reduce your plan administration burden

• Out of the IRS Spotlight

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Questions?

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Contact

Dave Zahller

866.573.044

dave.zahller@securitybenefit.com

Services offered through Security Distributors, Inc., a subsidiary of Security Benefit Corporation (Security Benefit). Security Benefit is indirectly controlled by Guggenheim Partners, LLC.