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Review Of 457b Plans

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LAUSD's 457b plan has all mutual funds and one fixed bond. Not all of the mutual funds are low cost, meaning below 1% total costs to participants. Still it is in the right direction away from the costly insurance laden 403b.


Link does not work. Here is the piece from Yahoo finance:


Mark P. Cussen, On Tuesday March 16, 2010, 12:42 pm EDT

457 plans are typically offered to certain employees of state and local governments and municipalities. This plan was originally very unique with respect to the rules pertaining to contributions, distributions and eligibility. However, the Economic Growth and Tax Relief Reconciliation Act of 2001 substantially overhauled the major provisions of this plan, making it much more like 401(k) and 403(b) plans. However, this plan still differs substantially from its mainstream cousins in some respects. This article outlines the basic tenets of 457 plans and how they work.


Plan Basics

Modern 457 plans resemble 401(k) and 403(b) plans in that they allow participating employees to defer a portion of their income into a tax-deferred savings plan that offers a preset selection of investment choices. Contributions grow tax-deferred until retirement, when they are either rolled over or withdrawn. However, they are not classified as qualified plans, and are therefore not bound by the same rollover and distribution rules as plans that fall under ERISA guidelines. Traditionally, the only institutions that could establish 457 plans were state and local governments and entities and certain 501©3 organizations. However, the Economic Growth and Tax Reconciliation Act of 2001 loosened this restriction considerably, and many more employers can now also offer these plans to employees instead of, or in addition to their current plans. Employers offer 457 plans to employees for the same reasons that other employers offer 401(k) or other plans: they help to attract and retain quality employees, and also become an asset on the employer's balance sheet.


Plan Contribution Limits

457 plans now have the same contribution limits as 401(k) and 403(b) plans. As mentioned previously, some plan participants, such as employees of state universities and school districts actually have the choice of contributing to either a 457 plan or a 401(k) or 403(b) plan, or even both at once. The provisions in EGTRRA also lifted the coordination of benefits limitation for these plans, thus allowing qualifying participants to contribute the maximum amount for both plans.


These plans also contain the same standard catch-up contribution provision found in 401(k) and 403(b) plans, which allows workers age 50 and over to contribute an additional $5,500 in 2010 to their plans. However, there is another catch-up provision that is unique to this plan. Employees who are within three years of normal retirement age can contribute another full deferral limit into their plans for that year, which means that a plan participant could conceivably contribute a total of $33,000 into their 457 plan for 2010 - plus another $16,500 into a 401(k) or 403(b) plan if that is also available.


However, this second catch-up provision is governed by a complex set of rules. It is offered at the employer's discretion and is only available for those who have unused deferrals from past years, and is limited to the lesser of this amount twice the current deferral limit. For example, an employee who only contributed $8,000 to his 457 plan in 2009 could contribute an additional $8,500 in 2010. A participant who contributed nothing in 2009 could contribute the full additional $16,500 in 2010. All contributions to 457 plans are deductible, but unlike qualified plans, 457 plans are not allowed to contain a Roth feature. These plans also do not have matching contributions of any kind, although qualifying participants are eligible for the Retirement Saver's Credit. Recent legislation has also allowed employers to institute automatic 457 plan contributions for all employees, although employees may opt out of this at their discretion.


Types of 457 Plans

The key characteristics that separate 457 plans from 401(k) and 403(b) plans can be divided into four separate categories: governmental and nongovernmental, eligible and ineligible. Eligible plans are noted as 457(b) plans, while non-eligible plans are listed as 457(f) plans. Governmental 457(b) plans are the most common and contain all of the characteristics described above. Non-governmental plans can be established by qualified 501©3 organizations that also offer 403(b) plans, but they can only be offered to highly-compensated workers, although the exact level of income for qualifying employees is not stated precisely. However, it must meet some sort of ascertainable standard set by the employer. These plans have therefore been given the nickname of "top hat" plans.


Non-governmental plans can be either eligible or ineligible, but they are subject to several restrictions that governmental 457s are not. The assets in these plans are not held in trust for the benefit of the plan participants, as they are in governmental plans, nor do they have the same rollover privileges. Ineligible 457(f) plans essentially function as nonqualified plans for nonprofit organizations that are ineligible to establish any other kind of nonqualified plan. 457(f) plans follow most of the same rules as any other nonqualified plan and must therefore contain the standard risk of forfeiture and exposure to creditors of plan assets.


Rollover and Distribution Rules

457 plans do not have the same restrictions on distributions found in qualified plans. Participants can take regular distributions from a 457 plan as soon as they retire, regardless of whether they have reached age 59.5. The 10% early withdrawal penalty does not apply to these plans under any circumstances, although all distributions are still taxed as ordinary income. Participants can also roll their 457 plans over into any other type of qualified plan or IRA, unless their plan is ineligible. If so, then they can only roll the plan over into another ineligible 457(f) plan.



457 plans are probably the least common type of group employee plan used in America today. Although recent legislation has made them much simpler in nature and more like other types of plans, they are still unique - and very complex - in many respects. They are the only nonqualified group plan available with tax-deductible contributions, and they are also the only plans that come in more than one form.


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