Selecting the right pension program
Supplemental retirement plans, also known as 457 deferred compensation plans, have served as valuable retirement options for millions of public sector employees. Deferred compensation plans, which are the public sector’s version of the private sector’s 401(k) plans, enable employees to contribute a portion of their pre-tax income to an employer-sponsored retirement account.
Most public employers now offer such plans. In recent years, participation has grown dramatically as both employers and employees have recognized the importance of saving for retirement. At the same time, employers have enhanced their deferred compensation plan offerings.
Today, employers have many options available to them to design the plan that best suits the needs of their employees. In evaluating their choices, local governments designing or modifying plans should consider several factors:
* Packaged or customized? Many plan providers offer “turnkey,” or packaged, programs, which include the product options, marketing, educational services, record- keeping and administration. Such all-inclusive programs offer the advantage to the plan sponsor of working with only one provider.
In contrast, with a customized approach, the plan sponsor chooses the program’s products — sometimes from multiple providers — and selects the marketer of the program. The marketer, in turn, works with the product providers and the administrator or record-keeper. Customized programs allow employers to select the best provider for each service, and they may save money.
However, selecting and managing such programs requires involvement from the plan sponsor. Additionally, one program provider can offer consistency in service, while multiple providers may offer differing levels of service.
Especially important is a program that offers investment diversity. A successful program should offer options that represent all asset classes, enabling employees to customize their portfolios according to their risk tolerance and various life stages.
* Employee education. Education and counseling are critical components of a successful retirement program. To maximize benefit awareness and participation, the plan sponsor should consider a provider that offers educational services such as group seminars, individual retirement counseling and assistance through electronic media.
Local service representatives employed by the provider can provide education and counseling to public sector employees, answer their questions and help them track the progress of their portfolios. Such counselors can help employees identify their current and future financial needs, analyze their circumstances and tailor their investment portfolios to suit their needs.
* 401(a) employer match. Sponsors that want to supercharge participation in a 457 deferred compensation plan have found that providing matching dollars through a 401(a) plan (as a supplement to the 457 plan) will greatly increase the level of employee participation.
Such plans are now available in many areas, and interest in them is growing. A 401(a) plan operates on principles similar to private sector 401(k) plans. Employers contribute a given dollar amount or percentage of salary to an employee account, provided the employee participates in a 457 plan.
Deferred compensation helps employees boost their retirement savings, increases their confidence in a better future and rewards them for their hard work. With so many options, each local government must be certain that its plan provider offers enhanced services so that its employees can take full advantage of their 457 plans.