Easier to administer, not subject to an early withdrawal penalty tax, offering an opportunity for an advisor to make a living, especially in a small marketplace — what’s not to love about the 457 plan?
While most advisors serving the public and nonprofit sectors are very familiar with 403(b) plans, fewer are familiar with 457 plans. And that’s too bad, since a 457 plan offers public sector employees things that other plans do not, notes Security Benefit execs Mark Turner and Thomas Granger.
Turner and Granger were the featured speakers in a Dec. 4 NTSA webcast, “457 Plans in the Public Sector: History, Evolution and Opportunities.”
What They Offer
Section 457 plans, available to governments, special administrative districts, school districts and non-church nonprofits, are more flexible than other retirement plans. Turner and Granger outlined some of the features of 457 plans that other plans don’t have:
No age limit. A participant can withdraw funds from a 457 plan at any age.
Financial emergency distributions. A participant may withdraw funds from a 457(b) plan for unforeseeable financial emergencies. Among the expenses these distributions can cover are loss of property not otherwise covered by insurance, funeral expenses and the effects of events beyond the control of participants. Granger added a note of caution, however, calling the rules for such distributions “strict and finite.” And he noted that a plan does not have to allow such distributions.
No early withdrawal penalty. Distributions from a 457 plan are never subject to a 10% early withdrawal penalty.
No offset. An employee may contribute to both a 457(b) and 403(b) plan at the same time, up to a combined $36,000 annual maximum ($18,000 to each), or a combined $48,000 for those age 50 or older with catch-up contributions. Turner noted that it is not uncommon for both plans to be made available by some public sector employees, remarking, “We do see a lot of school districts that have adopted 403(b) plans and have adopted 457 plans. It does give an opportunity to salary defer a whole lot more than they would through a 401(k) plan.”
No universal availability rule. Unlike 403(b) plans, there is no universal availability requirement for 457(b) plans.
Special plans. There are specialized 457 plans that are available to specific employees and types of employers: 457(b) tax-exempt plans, which are available to highly compensated employees, executives, managers, directors and officers — and not rank-and-file employees, and 457(f) plans, which available to governments and non-church nonprofits and are designed for key managers. Granger noted that “the sky’s the limit” regarding the amount that can be saved in the latter. There are downsides to these types of 457 plans, however — they are less portable, and cannot be rolled over into other kinds of funds; also, loans and catch-up contributions are not allowed for 457(b) tax-exempt plans.
Opportunities
Turner and Granger say that 457s offer advisors opportunity. Turner said that “One of the nice things is that you’re never going to see 10 providers in any agency,” adding, “generally speaking, you’re never going to see more than three providers for any particular area or market.”
They outlined three key principles they contend advisors in the 457 market should remember:
1. Avoid large plans.
2. Don’t try to replace a provider — go in alongside an existing provider and argue that you can help provide employees a choice.
3. Leverage relationships, local credibility and enhanced service.
They also suggested that advisors pursue opportunities with:
• cities;
• counties;
• special districts;
• school districts;
• non-profits; and
• hospitals.
Also remember, said Turner and Granger, that there are schools that do not allow 403(b) advisors on campus, but do allow 457 advisors.
While most advisors serving the public and nonprofit sectors are very familiar with 403(b) plans, fewer are familiar with 457 plans. And that’s too bad, since a 457 plan offers public sector employees things that other plans do not, notes Security Benefit execs Mark Turner and Thomas Granger.
Turner and Granger were the featured speakers in a Dec. 4 NTSA webcast, “457 Plans in the Public Sector: History, Evolution and Opportunities.”
What They Offer
Section 457 plans, available to governments, special administrative districts, school districts and non-church nonprofits, are more flexible than other retirement plans. Turner and Granger outlined some of the features of 457 plans that other plans don’t have:
No age limit. A participant can withdraw funds from a 457 plan at any age.
Financial emergency distributions. A participant may withdraw funds from a 457(b) plan for unforeseeable financial emergencies. Among the expenses these distributions can cover are loss of property not otherwise covered by insurance, funeral expenses and the effects of events beyond the control of participants. Granger added a note of caution, however, calling the rules for such distributions “strict and finite.” And he noted that a plan does not have to allow such distributions.
No early withdrawal penalty. Distributions from a 457 plan are never subject to a 10% early withdrawal penalty.
No offset. An employee may contribute to both a 457(b) and 403(b) plan at the same time, up to a combined $36,000 annual maximum ($18,000 to each), or a combined $48,000 for those age 50 or older with catch-up contributions. Turner noted that it is not uncommon for both plans to be made available by some public sector employees, remarking, “We do see a lot of school districts that have adopted 403(b) plans and have adopted 457 plans. It does give an opportunity to salary defer a whole lot more than they would through a 401(k) plan.”
No universal availability rule. Unlike 403(b) plans, there is no universal availability requirement for 457(b) plans.
Special plans. There are specialized 457 plans that are available to specific employees and types of employers: 457(b) tax-exempt plans, which are available to highly compensated employees, executives, managers, directors and officers — and not rank-and-file employees, and 457(f) plans, which available to governments and non-church nonprofits and are designed for key managers. Granger noted that “the sky’s the limit” regarding the amount that can be saved in the latter. There are downsides to these types of 457 plans, however — they are less portable, and cannot be rolled over into other kinds of funds; also, loans and catch-up contributions are not allowed for 457(b) tax-exempt plans.
Opportunities
Turner and Granger say that 457s offer advisors opportunity. Turner said that “One of the nice things is that you’re never going to see 10 providers in any agency,” adding, “generally speaking, you’re never going to see more than three providers for any particular area or market.”
They outlined three key principles they contend advisors in the 457 market should remember:
1. Avoid large plans.
2. Don’t try to replace a provider — go in alongside an existing provider and argue that you can help provide employees a choice.
3. Leverage relationships, local credibility and enhanced service.
They also suggested that advisors pursue opportunities with:
• cities;
• counties;
• special districts;
• school districts;
• non-profits; and
• hospitals.
Also remember, said Turner and Granger, that there are schools that do not allow 403(b) advisors on campus, but do allow 457 advisors.
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