All the key resources for leveraging the 457(b) advantage for...
School districts who try to move to a single 403(b) vendor get pushback from vendors, Third Party Administrators and industry lobbying groups. A focus on the 457(b) offers school districts an opportunity to simplify and control a key supplemental saving plan. It’s a win for the employer and the employee.
The key advantages of the 457(b):
- Easier to administer, especially when you adopt a state‑based 457(b) plan
- Easier to control, as you are not required or pressured to offer multi‑vendors
- Easier to maintain quality by not offering companies with dubious investing costs and sales practices
- Easier to emphasize plan education over plan sales
More Advantages
Employee Benefits
The 457(b) is better for your employees for many reasons.
- Money can be accessed at any age, tax penalty-free, upon separation of service (must be age 55 with a 403(b) plan).
- A quality low-cost plan can help ensure a better retirement for all employees
- Single vendor 457(b) plans eliminate the sales-over-education environment that exists with multi-vendor 403(b) plans.
- Potentially higher contributions limits via the three-year catch-up provision.
- The 457(b) is the primary defined contribution plan for firefighters, police, judges, local city employees and even state representatives. Having a similar plan gives educators more outlets for seeking information and camaraderie.
- There is no 10% early withdrawal penalty when withdrawing money for an Unforeseen Emergency.
- Can contribute the maximum allowable to both the 457(b) and the 403(b).
- Unlike the 403(b), Collective Investment Trusts (CITs) are permitted in the 457(b).
Operational and Regulatory Advantages
Why the 457(b) gives school districts greater control
Many states have put laws into effect restricting school districts ability to put their 403(b) plans out to bid and/or limit the number of available vendors. To date, only Illinois has put restrictions on 457(b) plans and this came about because of heavy lobbying by the National Tax-Exempt Savings Association (NTSA) which is funded by high-cost financial companies worried about their ability to continue to sell high-cost products to educators. The NTSA fears the day that school districts begin favoring the 457(b) over the 403(b).
plan enrollment is easier with a 457(b)
Multi-vendor 403(b) plans make it hard to offer online enrollment. It would be easy for a single vendor 457(b) plan to offer online enrollment. Most state 457(b) plans offer online enrollment (Ohio’s plan is one example).
No Universal Availability and Meaningful Notice Requirement
Districts who continue to offer a 403(b) would still need to comply with this 403(b) requirement. If your district still offers a 403(b) the Universal Availability and Meaningful Notice Requirement could also be used to promote the 457(b).
plan education is easier with a single vendor 457(b)
Unlike the 403(b) where numerous vendors and sales agents are fighting for market share, a single vendor 457(b) plan allows employers to offer a single, objective message.
Fiduciary Protections
more fiduciary protections THAN with the 403(b)
Unlike the 401(k), government K-12 403(b) plans fall outside of ERISA (Employee Retirement Income Security Act of 1974), a federal law that requires employers to act in the best interest of their employees when offering retirement plans. This fiduciary loophole is the primary reason that government K-12 403(b) plans are so bad. Fortunately, many states have 457(b) fiduciary laws that are designed to protect employees. In practice, many school districts are unaware or ignore these laws, but they do exist.
The Small Business and Jobs Protection Act of 1996 added 457(g) which requires:
“(1)In general, A plan maintained by an eligible employer described in subsection (e)(1)(A) shall not be treated as an eligible deferred compensation plan unless all assets and income of the plan described in subsection (b)(6) are held in trust for the exclusive benefit of participants and their beneficiaries.”
The key term is “held in trust for the exclusive benefit of participants and their beneficiaries.” This is very similar to ERISA’s exclusive benefit rule. There is a fiduciary duty owed to participants by the employer in 457(b) plans that does not exist in 403(b) plans. It’s important to note that most states have 457(b) fiduciary protections that often mirror ERISA language.
Implementation Guidance
the simplest way to offer a quality 457(b) plan
Adopt your state’s 457(b) plan (if available to educators in your state; click to learn more about your state’s 457(b) plan). If other 457(b) vendors are currently offered, close them to new contributions. This would allow the district to focus education efforts on one, quality plan.
if your state doesn’t permit educators to contribute to its 457(b) plan
Choose one quality low-cost vendor such as Aspire and Fidelity Investments. You can also do what Los Angeles Unfied School District did and create a 457(b) plan from scratch. Another option is to join a consortium such as the Southern Education Retirement Consortium.