Groundwork key to solid 457 plans
One of the best employee benefits available to the public sector is the Section 457 deferred compensation retirement program. These payroll-deduction plans are employer-adopted, voluntary and flexible.
Employees may select the amount of pre-tax deferrals, investment preferences and die form and timing of retirement distributions. For employers, these plans do not carry the substantial administrative burdens often associated with traditional pension programs.
It is vital for cities and counties to lay solid groundwork before soliciting proposals from outside vendors. Key steps before advertising for providers include.
* Identifying regulatory constraints and changes. These programs operate under Section 457 of the Internal Revenue Code and its associated Treasury Regulations, while relevant state laws vary. Therefore, it is important to obtain current information from the appropriate state agency, which may also provide assistance if the state offers a deferred compensation plan open to local government employees;
* Determining if portions of the program will be self-administered. In-house administration offers the greatest control but requires the greatest effort and expense Recordkeeping and administrative functions will be relatively straightforward and will require staff commitment, special expertise and start-up costs. The amount of resources required for responding to participant questions may be burdensome.
Plans from third party administrators (TPAs) are often easier to put in place and operate. TPAs may include not-for-profit corporations, consultants, actuaries, insurance companies, banks and mutual fund companies. Typical packages include: 1) a plan document, 2) adoption assistance, 3) participant enrollment and education, 4) recordkeeping, 5) benefit payment and 6) services for the participants.
Additionally, the range of investment options is a primary consideration when selecting one or more outside vendors. Other considerations are the perceived endorsement of particular companies, potential hidden or higher costs and lack of audit control.
A local government’s situation may dictate a mix between in-house and outside administration. For example, the government could adopt its own plan, contract for recordkeeping and enrollment services from a TPA and secure investment management through other providers;
* Developing the selection process. Since federal, state and local laws require that the same basic provisions of a deferred compensation program be offered by each provider, the proposal solicitation focuses on each vendor’s business strategy, investment products, services and fees. Six to eight complete proposals will give a reasonable choice of alternatives.
An important step in the selection process is to create a selection committee of those directly responsible for plan implementation, participation and administration. A healthy consensus may include representatives from the participant group and the finance, human resources and ad@ ministration departments.
Local governments can solicit proposals in a number of ways beyond the specific media in which they may be required to advertise. Finance directors from similarly sized communities are an excellent resource, as are pension and public-sector trade journals and professional organizations such as the Government Finance Officers Association and the National Association of Governmental Deferred Compensation Administrators.
Sufficient preparation is key to ensuring the solicitation, review and selection of 457 plan providers will run effectively.