Section 457 Plans What is a Section 457 Plan? Criteria for Choosing a Section 457 Plan Vendor Publication 916 CSEA CalPERS TASK FORCE AFL-CIO California School Employees Association Our mission: To improve the lives of our members, students and community. January 2017
The CSEA Member Benefit Committee developed the attached Module, which contrasts the differences between a Section 457 deferred compensation plan and a Section 403(b) plan. The Module provides good investment guidelines for individuals, as well as brief characteristics of several companies, including CalPERS, who offers Section 457 plans. If your district does not currently offer a Section 457 plan, your chapter may want to bargain to have such a plan offered on a voluntary payroll deduction basis. It is important to note that this is an area of potential abuse by vendors contacting school districts to sell different types of investment options, including 403(b) accounts. As a result of risky mis-information, there was a piece of legislation introduced to produce consumer education for school employees. The end result was a website developed to offer free objective information about retirement investment options, vendors and the products they offer. The website (www.403bcompare.com) was created to help employees of California s local school districts, community college districts or county offices of education make better informed investment decisions by offering such valuable information. Once the IRS issues its final regulations, the Insurance Committee will issue appropriate supplementary information via subsequent bulletins. California School Employees Association 2045 Lundy Avenue San Jose, CA 95131 (408) 433-1309 (800) 632-2128 i
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Table of Contents Changes with EGTRRA 2001....1 Making an Informed Section 457 Plan Decision What is a Section 457 Plan?....3 How a Section 457 Plan Works...3 How a Section 457 Plan Differs from a 403(b) Plan...5 Choosing a Section 457 Plan Vendor....6 Before You Invest....6 Section 457 Plan Vendor Highlights....8 Staying in the Plan After You Retire...10 Fund Trading Restrictions.... 11 This brochure provides an overview of a Section 457 deferred compensation plan. To be eligible for participation, this type of plan must be collectively bargained with your district, and the official plan document will control the actual benefits offered to you. Before participating in a Section 457 plan, you should carefully review the terms of the plan and consider each vendor s investment instruments, including its objectives, risks, and fees and expenses. Please contact the CSEA if you have questions about the information provided in this brochure. iii
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Changes with EGTRRA 2001 The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made a number of changes in how governmental 457 plans are treated, the most notable of which is that the coordination of benefits limitation was removed. This allows a person whose employer has a 401(k) or 403(b) and a 457 to defer the maximum contribution amounts to both plans instead of coordinating the total and only being able to meet a single limit amount. Thus a participant can contribute the maximum $16,500 for 2009 into their 401(k) and also the maximum $16,500 into their 457 plan. If that person s age is at least 50 at the end of the current tax year, they can contribute the additional catch up mount into each plan also, meaning an additional $5,500 into the 401(k) and another $5,500 into their governmental 457 (catch-up contributions are not provided for non-governmental 457 plans). The total would then be $44,000 deferred instead of the $22,000 that would have been allowed if the coordination of benefits provision had not been repealed in regard to the governmental 457 plan. As a result, many governmental employers have now set up 457 and 401(k) plans for their employees, and non-profit employers have set up 403(b) and 457 plans each allowing their employees to invest in both. Some state universities and school districts have access to all three tax-deferred plans. However, the total combined annual contribution to 401(k) and 403(b) plans is subject to the $16,500 limit and the $5,500 catch-up limit. Other notable changes made in the EGTRRA legislation were increasing the maximum deferral amount from the approximately $8,500 that was previously allowed to the same maximum elective deferral amount that 401(k) plans and now 403(b) plans allow, and easing restrictions on some plan rollovers. Governmental 457 plans may be rolled into other types of retirement plans with few restrictions beyond the normal ones for any other type of employer provided plan, which includes separation of service or disability. This includes other 401(k) and 403(b) plans and also IRA s. IRA s have much greater flexibility in withdrawal and conversion privileges. In contrast, non-governmental 457 plans can only be rolled into another non-governmental 457 plan. CATCH UP PROVISIONS The 457 plan allows for two types of catch-up provisions. The first is similar to other defined contribution plans and amounts to an additional $5,500 that can be contributed as noted above. This option for making catch-up contributions is only available under governmental 457 plans. The second option is much more complicated and is available under both governmental and non-governmental plans. It can be elected by an employee who is within 3 years of normal retirement age (and perhaps eligible retirement at any age). This second catch-up option is equal to the full employee deferral limit or another $16,500 for 2009. Thus, a person over 50 within 3 years of retirement and who has both a 457 and a 401(k) could defer a total of $52,500 into their retirement plans by utilizing all of their catch-up provisions. The second type of catch-up provision is limited to unused deferral limits from previous years. An employee that had deferred the maximum amount of money into the 457 plan every year they were employed previously would not be able to utilize this extra catch-up. External links and references IRS website page regarding 457 plans (http://www.irs.gov/retirement/article/0,,id172437,99.html) 403(b) and 457 Plan Feature Comparison Chart (8pp pdf file) (http://www.irs.gov/pub/irs-pdf/p4406.pdf) IRS 403(b)/457 Online Resource Guide (http://www.irs.gov/retirement/article/0,,id=96315,00.html) IRS Section 457 plan outline (28pp pdf file) (http://www.irs.gov/pub/irs-utl/457_outline.pdf) Section 457 of the IRS code (http://assembler.law.cornell.edu/uscode/html/uscode26/usc_ sec_26_00000457----000-.html) -From Cornell Law School 1
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Making an Informed Section 457 Plan Decision Whether you plan to spend time with family and friends, start a new career, travel, or pursue a hobby, it s up to you how to spend your retirement years. But, saving for that phase of your life retirement takes time and planning. A Section 457 plan can help. With a Section 457 plan, you have the flexibility to create a customized retirement program that reflects your personal and financial goals. WHAT IS A SECTION 457 PLAN? A Section 457 plan is a tax-deferred compensation plan that works very much like other tax-favored retirement plans, such as a 403(b) or 401(k). The name refers to Section [457] in the Internal Revenue Code, which governs the plan. State and local government employers and tax-exempt entities may sponsor a Section 457 plan for their employees. Why contribute to a Section 457 Plan? 1. Save for your retirement. 2. Reduce your taxable income. 3. Your contributions and earnings grow on a taxdeferred basis. 4. The IRS allows you to contribute to both a 403(b) plan AND a 457(b) plan. 5. Your account balance is portable. HOW A SECTION 457 PLAN WORKS A Section 457 plan offers its participants the opportunity to set aside and accumulate tax-deferred dollars for retirement. Here s how it works: Section 457 Plan Contributions: Under the plan, you may decide how much money to defer from your pay check to the plan (up to the plan s maximum). These voluntary contributions are exempt from federal income tax, which in effect, reduces the participant s taxable income. Section 457 Plan Investments: A participant s contributions are directed to the Section 457 plan vendor working with your school district. Your district may offer more than one Section 457 vendor. Based on the vendor chosen, a school employee may invest contributions in that vendor s investment vehicles. Contributions (including investment earnings, if any) grow on a tax-deferred basis until withdrawal. Section 457 Plan Distributions: Distributions from the plan are taxed as ordinary income when withdrawn. You may receive a distribution from the plan at retirement, in the event of an extreme financial hardship or unforeseeable emergency, or upon termination you re your employer. Section 457 Plan Portability: The account balance in a Section 457 plan is portable. This means you can move savings with you if you change employers. You can roll over this balance into a new employer s Section 457 plan, 403(b), or 401(k) plan (if the plan accepts rollovers) or into an IRA. 3
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How a Section 457 Plan Differs from a 403(b) Plan Section 457 and 403(b) plans share many of the same features and have some differences, as well. The chart below provides a comparison of the two types of plans. Your 2012 contribution opportunities If you contribute the maximum basic salary deferral limit, and you qualify for the Double Limit Catch Up provision described below, you have the potential to contribute up to $34,000 to your 457(b) plan in 2012. Basic annual limit: $17,000 or 100% of compensation, whichever is less. The IRS increases this limit by $500 each year. Section 457 and 403(b) Plan Comparison Section 457 Plan 403(b) Plan Contribution limits A participant may contribute up to $18,000 for 2017, the IRS increases this limit by $500 each year. Age 50 and over catch-up provisions A participant age 50 or older may be able to make additional contributions to the plan. For 2017, this amount is $6,000. Alternatively, a participant may be able to contribute an additional amount (up to $30,000 in 2006) if he did not maximize contributions to the plan in prior years. Age 50+ Catch-up: If you are age 50 or over and participate in a government 457(b) plan, you may be eligible to contribute an additional $6,000 in 2017. Rollovers into the Plan Generally, a participant may roll over his account balance from 401(a) plans, 401(k) plans, Section 457 plans, and 403(b) plans, as allowed by an employer and/or the plans vendors. Distributions while employed Generally, a participant may roll over his account balance from 401(a) plans, 401(k) plans, Section 457 plans, and 403(b) plans, as allowed by an employer and/or the plans vendors. A participant may take an in-service distribution if are age 59½ or older; if permanently disabled; or in the event of an extreme financial hardship. Distributions after separating from employment Federal and state income tax treatment Upon separation from an employer, a participant can: Leave his money in the Plan, when allowed by an employer or plan vendor Take a lump- sum distribution Arrange a rollover of funds into an eligible plan or IRA Arrange for other forms of payment, as offered under the plan. Section 457 plan distributions are subject to ordinary income tax when paid, unless rolled over into an eligible retirement plan or IRA. When tax penalties apply on early distributions A participant is not subject to early distribution penalties, except for amounts attributable to rollovers into the Section 457 plan from an employer s 403(b), 401(a), or 401(k) plan. In most cases, a 10% federal tax penalty applies for distributions before age 59½. State tax penalties or penalties on money rolled over from another tax-deferred plan, may also apply. Minimum required distributions A participant is required to take a minimum distribution no later than April 1 following the year in which he turns age 70½, unless still employed. A 50% tax penalty applies if minimum required distributions do not occur. 5
Double Limit Catch Up: If you have under contributed to your 457(b) plan in the past, and you are within three calendar years of your normal retirement age, you have the potential to contribute up to an additional $17,000 in 2012. You should also keep in mind that any contributions you make to a 403(b) plan, 401(k) plan, or other Workplace Savings Plan in 2012 do not reduce the amount you may contribute to your 457(b) plan. Unlike with 401(k)s and 403(b) s, the IRS won t slap you with a penalty on withdrawals you make before the age 59 1/2. You will, however, owe income tax on all withdrawals, regardless of your age. Going into a 457 plan early still isn t a good idea. Leaving the money to compound until you re ready to retire will leave you with a much bigger nest egg. CHOOSING A 457 PLAN VENDOR Most Section 457 plans offer a choice of several vendors through which they manage their accounts and invest their contribution dollars. American Fidelity Assurance Company CalPERS Can an employee contribute to both a Section 457 and a 403(b) plan? Under the rules established by the Economic Growth and Tax-Relief Reconciliation Act of 2001 (EGTRRA), participants are allowed to contribute the maximum elective deferral limit to both a Section 457 plan and a 403(b) plan. For 2017, this is $18,000 or 100% of your includible compensation to a 457(b) plan. Participation eligible for catch-up provisions can defer even more. CSEA does not sponsor or endorse any Section 457 vendor. The Insurance Committee shows vendors who have a presence with CSEA. If you think one of these vendors meets the needs of the CSEA members in your Chapter, you should let the Bargaining Committee, or Employer/Employee Insurance Committee know that you would like to have a particular vendor interviewed. To help you make an informed choice, the attached vendor highlight sheets outline some criteria to consider in choosing a Section 457 plan vendor. Note: The CSEA cannot recommend a specific vendor. You may want to consult a financial planner or investment advisor to help you decide. BEFORE YOU INVEST To select a vendor that best fits your needs, there are various things to consider including the vendor s: Background and history Investment choices Historic rates of return on participant investments Fees and expenses There is no shortage of advice and analyses comparing tax deferred annuities to other ways to save for retirement. It s on the internet, in the paper, on TV, and in investment magazines and publications. Don t let this information distract you from your basic goal of protecting yourself against coming up short of income at retirement. 6
Minimum service expectations should include toll free service numbers and clear, concise participant statements showing principal expenses and investment earnings. Retirement planning or consulting services would be an added value, especially for those who do not have a great deal of expertise in financial matters. Each vendor offers an array of investment options to choose from, many of which are mutual funds. (A mutual fund pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, or other securities.) You will choose how to invest your contributions, based on your personal investment strategy. Keep these basic investment guidelines in mind: Think about your tolerance for risk. Can you handle fluctuations in your investment earnings or do you need a more stable and predictable return? To determine whether an investment vehicle is suitable for your retirement plan, review its prospectus to see how the fund intends to invest, learn what types of securities they ll be investing in, and understand what risks may be involved. Investment objectives should be consistent with the long-term requirements of your retirement assets. Consider the length of time you have to invest your contributions. You might choose more aggressive investments if you have 20+ years until you retire; alternatively, as you get closer to retirement you may want to shift your investments into more conservative instruments. Remember the saying, Don t put all of your eggs in one basket. Be sure to diversify your investments selections among a plan vendor s various asset classes. Diversification, asset allocation, or spreading your funds over a range of investments, is one strategy to significantly reduce all kinds of risk. You can diversify in a number of ways. You might invest in several different types of funds. Or, you can choose funds that are diversified within themselves, such as those holding a wide range of stocks and bonds. Only you can make the decision about which vendor and which investment options best meet your investment strategy. Be sure to ask questions and read the prospectus for the investment option(s) you are considering. It is your responsibility to determine the investments that make sense for you! 7
AMERICAN FIDELITY ASSURANCE COMPANY www.afadvantage.com 800-662-1106 Company Background American Fidelity Assurance Company was established in 1960. They currently: Have more than 1,500 employees. Provide products and services to more than 600 school districts in California and more than 3,000 nationally. Are licensed to do business in 49 states and the District of Columbia Provide service for 2,940 403(b) retirement plans and 139 Section 457 plans. American Fidelity s field staff is trained to offer educational meetings on annuities, which include fixed and variable annuities. All field staff are licensed with Series 6 and Series 63 Securities License. Plan Assets Investment Options And Fees American Fidelity Assurance Company has approximately $312.2 million of separate account assets under management. A wide range of investment choices and options are offered. Administrative fees/sales charges include: Sales charges: None Front-end loads: None Back-end loads: Policy years 1-5: 8% Policy years 6-10: 4% Policy years 11+: 0% 12-b 1 fees: None Redemption fees: None Purchase fees: None Exchange fees: None Account fees: American Fidelity Separate Account Annual Expenses: 1.50% Management fees: Please refer to Annual Portfolio Operating Expenses. Other expenses and fees: None Total fund expense ratio: Please refer to Annual Portfolio Operating Expenses. After one year of participation, there are no American Fidelity Group Variable Annuity charges for plan benefit withdrawals paid to the participant or the participant s beneficiary. This waiver applies to withdrawals for the following benefits: Retirement, separation from service, and for certain unforeseen emergencies. Member Service Acceptance of Rollovers/ Transfers Members can review their account information online www.afadvantage.com or by phone. Planning and modeling tools are available by contacting local representatives. Home office representatives are available from 8 a.m. to 5 p.m. CT, and field representatives are available 8 a.m. to 5 p.m. PST. American Fidelity allows direct transfers from other Section 457 accounts. Rollovers from other plans such as 403(b) and 401(k) are not allowed. 8
AMERICAN FIDELITY ASSURANCE COMPANY www.afadvantage.com 800-662-1106 Payout/Distribution Options The following payout options are available: Lifetime Only Annuity: Monthly payments during the life of the annuitant. If this option is elected, payments will cease immediately upon the death of the annuitant and payments will end. Lifetime Annuity with Guaranteed Period: Monthly payments for the guaranteed period selected and thereafter for the life of the annuitant. Upon the death of the annuitant, any amounts remaining under the guaranteed period selected will be distributed to the beneficiary at least as rapidly as under the method of distribution being used as of the date of the annuitant s death. The guaranteed period may be 10 years or 20 years. Joint and Survivor Annuity: Monthly payments during the joint lifetime of the annuitant and a joint annuitant. Payments will continue during the lifetime of the surviving annuitant and will be computed based on 100%, 66 2/3%, or 50% of the annuity payment in effect during the joint lifetime. Period Certain: Monthly payments for a specified period at least five years but not more than 30 years. For pre-retirement withdrawals, you must meet one of the distribution qualifications in the IRC Code Section 457 to be eligible for a distribution from the account. Plan Trustee As allowed by Internal Revenue Code an annuity contract takes the place of an actual trust agreement. Therefore, a trust or trustee does not govern this plan. American Fidelity acts as the fund provider and assumer some of the plan s administrative services. 9
CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM (CALPERS) www.calpers.com 888-225-7377 ING CalPERS Provider 800-260-0659 Company Background Plan Assets Investment Options And Fees The California Public Employees Retirement System (CalPERS) is a tax-exempt state government agency, created specifically to administer retirement plans for public employees. CalPERS has administered defined benefit pension plans for state, local agency, and school employees for over 70 years. As a public retirement trust, CalPERS is not subject to acquisition, merger or bankruptcy. It is not an insurance company, mutual fund or commercial vendor, and they own no subsidiaries, limited liability companies, or affiliate lines of business. CalPERS is a non-profit organization. Over 500 agencies contract for the CalPERS 457 Program, and over 107 school and community college districts and 14 county offices of education offer the CalPERS 457 Program to their employees. CalPERS manages over $500 million in assets. A wide range of investment choices and options are offered. Administrative fees/sales charges include: Sales charges: None Front-end loads: None Back-end loads: None 12 b 1 fees: None Redemption fees: None Purchase fees: None Exchange fees: None Account fees: None Management fees: Vary by investment option; Other expenses and fees: There is a $50 annual account maintenance fee for maintaining a Self Managed Account and a one-time $50 loan origination fee for taking a loan Total fund expense ratio: Total fees, including investment management and administration are less than 1%. The average weighted cost per participant is. 64% per year. 10
STAYING IN THE PLAN AFTER YOU RETIRE The Plan is designed to help you save while you are working and supplement income when you retire. You can stay in the Plan after you retire. If you are not ready to make a decision, take your time- there s no immediate deadline. The law does not require you being taking Required Minimum Distributions (RMDs) from your retirement accounts by April 1 after the calendar year when you reach age 70 1/2 or quit working, whichever happens later. Keeping your retirement assets in the Plan provides several advantages: A wide choice of investment options so you can maintain your current portfolio or make adjustments as your personal situation or risk tolerance changes. Convenient 24/7 account management, plus access to information about the Plan, your account, and investment tools and education anytime, either online or by phone. A variety of flexible payout options when you are ready to withdraw your money. Personal assistance with your Plan account and payout choices from a CalPERS 457 Plan Account Manager. Whether you are close to retiring or already retired, consider meeting with a CalPERS 457 Plan Account Manager to review your account. You may want to talk with a tax or financial adviser before making financial decisions. FUND TRADING RESTRICTIONS CalPERS has a frequent trading policy to help protect the interests of CalPERS Supplemental Income 457 Plan participants. The policy is intended to prevent excessive short-term or disruptive trading in funds. Multiple round-trip trades into and out of a fund are subject to restrictions. Frequent trading drives up fund costs and potentially reduces fund performance. To view the policy, go to http://www.calpers.ca.gov/index.jsp?bc=/investments/ policies/other/home.xml. 457 Distributions are Flexible Stay with CalPERS in retirement No early withdrawal penalties Distribution options Monthly, quarterly, semi-annually Randomly, at-will Distributions are taxed as ordinary income when received 457 Portability Rollovers between 457, 401(k), 403(b) and IRA Consolidation into CalPERS 457 Distributions/rollovers out of 457 are subject to the receiving qualified plan s rules Purchase pension plans service credit 11
Member Service CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM (CALPERS) www.calpers.com 888-225-7377 ING CalPERS provider 800-266-0659 The CalPERS 457 Plan s interactive voice response system is available 24 hours a day, seven days a week. Consumer service representative are available 6 a.m. to 5 p.m. PST, Monday through Friday. The CalPERS 457 Plan s voice response system offers both English and Spanish. Live representatives are available for other languages and a TDD service (916-795-3240) is available for the hearing impaired. Participations have daily access to their account information by using either the Web site or the toll-free voice response system (800-260-0659). Through the Web site, www.calpers. ingplans.com, participants can access extensive account, plan, and investment information. In addition to mailing quarterly statements, we offer an online statement capability to give participants timely and easy access to their retirement plan information. The Web site provides a complete menu of educational materials. CalPERS has developed a comprehensive, education-based financial planning and benefit counseling process. The Web site provides a full range of calculators that enable participants to model tax savings and project savings rates under different assumptions. In addition, participants can download plan account information to either of two popular personal financial management software packages, Quicken or Microsoft Money. Acceptance of Rollovers/ Transfers The CalPERS 457 Plan accepts rollovers from all eligible plans including 401(k) and 403(b) plans and IRAs. The plan allows in-service distributions in the event of an unforeseeable emergency. The CalPERS 457 Plan also permits in-service withdrawals of accounts less than $5,000 if the participant has not made contributions to the account in the preceding two years. The CalPERS 457 Plan freely permits in-service withdrawals to purchase pension plan service credit from CalPERS and CalSTRS. Payout/Distribution Options Plan Trustee The Following payout options are available through CalPERS: Lump sum payment Installment payments in any amount or over any time period Partial lump- sum and installment payments Installment payments with cost of living adjustments (COLA) automatically built in Rollover to an IRA or to a new employer s Section 457, 401(k), 403(b) or 401(a) plan CalPERS is the Trustee of the CalPERS 457 Plan. The Public Employees Deferred Compensation Fund administered by CalPERS is a constitutional and statutory retirement trust. As trustee of the fund, the CalPERS Board has exclusive fiduciary responsibility over assets in the Public Employees Deferred Compensation Fund, and they duty to administer the fund for the exclusive benefit of participants in a manner assuring delivery of benefits and services at reasonable cost. As part of its fiduciary oversight, the Board meets monthly at a reasonable cost. As part of its fiduciary oversight, the Board meets monthly to review fund performance, review and decide asset allocation, review administrative services, review accounting practices and procedures, and review federal and state legislation affecting trust interests. CSEA has too many members who are elected to the CalPERS Board. 12