Governmental 457 plans account for more than half of the $76 billion contained in the nation's 50 largest public defined contribution and deferred compensation plans, statistics compiled by Pensions & Investments for the first time show.
In all, $41.5 billion was invested in 457 deferred compensation plans as of Sept. 30, the data revealed.
Coming in a distant second were 403(b) plans, with about $10 billion, dominated by the $8.6 billion in the New York City Teachers' Retirement System.
The most popular new plan, the 401(a), accounted for $5.3 billion.
(The DC information was collected through P&I's annual survey and directory of the 1,000 largest pension funds. Most data are as of Sept. 30.)
Public defined contribution plans include:
* The 457 plan. This deferred compensation plan can be offered by a state or local government or a non-church, non-governmental tax-exempt organization; many cannot accept matching contributions.
* The 401(a) plan. This allows an employee to voluntarily reduce his or her salary by a certain amount contributed to the plan; these plans often accept matching contributions.
* The 403(b) plan. This allows employees to purchase tax-sheltered annuities and is most commonly used in the education and health care sectors. Unlike 457 or 401(a) plans, 403(b) plans must use annuity contracts or mutual funds.
* The 401(k) plan. This allows an employee to reduce his or her salary by a certain amount through pre-tax contributions; employer matches are allowed. Federal law now bars public entities from starting new 401(k) plans.
The nation's largest public defined contribution plan is the Texas Municipal Retirement System, Austin, a money purchase plan with $10 billion. The New York City Teachers' plan is second; New York State Deferred Compensation is third, with $4.6 billion.
Many 457 plans have been around for decades, but most of the public defined contribution plans, especially 401(a) plans, were formed during the past 10 years. Now, that growth is slowing.
"I think there was a lot of push for defined contribution plans (during the bull market) because people wanted more control to invest their money," said Wendy L. Young, principal with Mercer Investment Consulting, New York. "People are less interested in that now."
So far this year, only one new plan has been launched - a statewide 401(a) plan in Ohio that is overseen by the Public Employees Retirement System of Ohio, Columbus. Introduced Jan. 1, the plan is the result of legislation passed before the market downturn, Ms. Young noted. Like many of the new plans launched during the equity markets high times, it is an optional plan. It is open to public employees who have five years or less of service.
Still a few states, including Oregon, Massachusetts and New York, are investigating adding defined contribution plans. In a switch, however, the states are looking at the plans as a way of solving budgetary problems. During the bull market, public entities added defined contribution plans as a way to compete for talent.
In Houston, a new 401(a) would be a repository for accrued sick and vacation leave pay, thereby avoiding Federal Insurance Contributions Act taxes, said Ralph Marsh, chairman of Houston's deferred compensation board. The new fund is in the planning stages.
And Randy Taylor, senior vice president of CitiStreet, North Quincy, Mass., thinks plan formation activity could be picking up.
"I've heard that there are other states where a new defined contribution plan is at least on their radar screens, but they (bills) have not been introduced," Mr. Taylor said. "This is an early warning looking out in the future."
Among established funds, public plan executives are taking closer looks at investment options and are more likely to drop underperforming funds.
For example, a few months ago the board governing Houston's $315 million 457 plan exchanged two investment options for better performing funds in the same asset classes. "In the bull market, everything was making money. We did not see a lot of changing of investment options," Mr. Marsh said. "Now we spend a lot of time paying attention to performance, both absolute and relative to their peer groups."
Eric Weisma, vice president and director of institutional government markets for Hartford Financial Services, Simsbury, Conn., said more plan sponsors are moving to a single-provider approach from the older 457 model with four or five vendors.
Searches are up between 30% and 40% this year from last, according to estimates from Hartford. And with their revenue streams dwindling as plan assets fall, "vendors are more careful about pricing and making sure it will be a profitable business for them" before they bid, Mercer's Ms. Young said.
"They're more careful how they spend their resources on things."
What's more, providers are more apt to file formal protests when they aren't selected, said John Barry, assistant attorney general for the State of Maryland, counsel to trustees of Maryland's $1.4 billion Supplemental Retirement Agency, Annapolis, Md.
"The general perception of increased competition in the industry is accurate," noted Mr. Barry, who is president of the National Association of Government Defined Contribution Administrators.
The competition is particularly intense because there are only a handful of real players in the public plan market, Mr. Weisma said. The major competitors are ING US Financial Services, Nationwide Financial, Great-West & Annuity Insurance Co, ICMA Retirement Corp., AIG VALIC and his company, he said. Also making appearances are Prudential Financial, Fidelity Investments and CitiStreet LLC, he said.
Competition also has resulted from federal tax law changes under the Economic Growth and Tax Relief Reconciliation Act of 2001 that eliminated some of the plan differences and allowed rollovers between some plans.
Portability brought new contenders to the public defined contribution arena, said Girard Miller, president and chief executive officer of ICMA Retirement, Washington. "Last year, everyone was getting used to the concept and now they are chasing those dollars."
At the same time, employees given the defined contribution plan choice are declining to take it, Mr. Miller said. Participants are more reluctant to take risk, he said. Only a fraction of eligible employees in Ohio and Florida have opted for their new defined contribution plan. However, in Florida, employees have one more opportunity to switch.
That reluctance on the part of participants has "had a chilling effect on the defined contribution industry in the public sector," Mr. Miller said.
And in one state, officials gave participants an option to leave the defined contribution plan. On Jan. 1, the Nebraska Public Employees Retirement Systems, Lincoln, added a cash balance plan and gave all participants in the state's $973 million defined contribution plans a one-time opportunity to switch to the new cash balance benefit, said Carol Kontor, state investment officer.
The Legislature approved the change after a study comparing defined benefit and defined contribution plans by Buck Consultants showed Nebraska's defined contribution plan benefits did not adequately provide for employees' retirement. Current participants who did not make a choice remain in the defined contribution plan. Employees hired after Jan. 1 automatically are in the cash balance program.