Proposed IRS regulations requiring 403(b) plans to follow 401(k)-like guidelines are complicating the retirement equation for many school districts.
Their solution: create 457 plans.
Consultants and defined contribution plan providers say the uncertainty surrounding the new regulations and a push to allow participants close to retirement to maximize their savings are driving the move to offer 457 plans in addition to 403(b) plans.
The proposed 403(b) guidelines, first issued in 2004 and expected to become effective January 2008, include requiring school officials to provide a written plan document, account for excess contributions and monitor the transfer of assets among multiple plan service providers.
While 457 plans have similar guidelines, the difference is that 457 plans typically have one bundled provider, which makes the administration process much simpler; 403(b) plans generally have multiple providers.
Experts say that the use of a single provider also makes 457 plans easier for employees to understand. In adding a 457 plan, officials hope the new plans will attract most of the employee contributions, thereby simplifying their administrative tasks.
Plans including the Harford County Public Schools, Bel Air, Md.; Atlanta Public Schools; and the State of Connecticut Retirement Plans and Trust Funds, Hartford, have recently added or are considering adding a 457 plan alongside existing 403(b) plans.
Harford County addition
Harford County schools recently added a 457 plan, and hired Lincoln Financial Group as bundled provider for both it and the 403(b) plan, said John Markowski, chief financial officer of the school district. School officials deem 457 plans easier to administer, he said.
Atlanta Public Schools issued an RFP last month for a bundled provider for a new 457 plan, according to the schools website. The school district has a $142 million 403(b) plan.
Executives at the school district hope employees will opt for the 457 plan because it has fewer administrative hassles, said a source familiar with the plan. Jeff Thomas, vice president of risk management, did not return three calls seeking more information.
ING U.S. Financial Services, Hartford, Conn.; AIG VALIC, Houston; and MetLife Inc., New York, are the three providers for Atlantas 403(b) program. The three firms are invited to bid for the new 457 plan, which is expected to start this summer.
Thomas Woodruff, executive director of Connecticuts $1 billion 403(b) plan and $1.5 billion 457 plan, said the state is considering offering a 457 as a supplement. While the state offers both plans now, participants have to choose between them, they cannot contribute to both.
Were starting to get inquiries from teacher unions and municipalities, and were starting to seriously look at it, said Mr. Woodruff.
For employees there is no difference. For some boards of education, they are concerned about the new responsibilities under the proposed 403(b) regs, he said.
Establishing a plan document, for example, includes issues related to eligibility, enrollment, deferrals, beneficiaries, selection of the fiduciary, rollover options, selection of the investment managers, and selection of the investment options.
There are a few boards in Connecticut that have created their own, small 457 plans, said Mr. Woodruff, adding that were trying to fix a bad situation; 457 plan regulations are much cleaner.
The state is probably a few months away from introducing legislation to allow school district employees to contribute to both the 403(b) and 457 plans, he said.