The 457(b) market may not draw as much attention as its flashier DC plan cousins, yet its market includes millions of people and entails nearly $1 trillion in assets. A recent webinar offered a look at the 457(b) market’s unique features and potential.
In “Understanding the $1 Trillion 457(b) Market,”Brent Neese, Executive Director of the National Tax-deferred Savings Association (NTSA), explained how a 457(b) plan works, who is eligible to participate in one, and how the 457(b) market differs from the 401(k) market.
Neese listed the important features of457(b) governmental plans:
- They are not subject to ERISA.
- Distributions are never subject to the IRS 10% early withdrawal penalty tax.
- No aggregation with other qualified plans: an employee may contribute to a 401(k), 457(b) and a 403(b) plan ($38,000 combined max deferral, $50,000 with age 50+ catch-up).
- Automatic enrollment subject to state anti-garnishment laws. This, Neese said, is a “muddled landscape,” with laws differing from state to state.
- Employer contributions are allowed, but offset any employee contributions.
- Employees of governmental employers may transfer assets from 457(b) accounts to state DB plans to purchase past service credits.
- A special three-year catch-up is available, but only to participants who are eligible to contribute up to the limit within the last three years but chose not to do so. This is a one-time election.
Similarly, Section 457 tax-exempt plans are not subject to ERISA, and:
- The plan must restrict participation to only a select group of management or highly compensated employees.
- Loans are not allowed.
- Rollovers to IRAs and other qualified plans are not allowed.
- Transfers to another tax-exempt 457(b) plan are allowed.
- Roth contributions are not allowed.
- An age 50 catch-up is not allowed.
- Contributions are not held in trust and are subject to the general liabilities of the employer.
- Automatic enrollment is not allowed.
Eligibility and Scope
States, municipalities, townships, special districts, government agencies and public schools all may offer 457(b) plans to their employees. Non-profit employers may offer “top hat” 457(b) plans. And all non-governmental 457(b) plans may also offer Roth accounts.
The 457(b) market is far larger than many people think, Neese noted. There are 90,000 units of local government in the United States, including:
- 16,360 townships
- 19,519 municipalities
- 3,031 counties
- 12,880 Independent School Districts
- 38,266 Special Districts (transit authorities, water authorities, etc.):
Furthermore, there are 22.9 million employees of governmental entities in the United States, including 2.8 million federal employees, 5.3 million state employees and 14.8 million local government employees.
Assets
The assets in 457(b) plans amount to $900 billion. Of that, state and local government plans account for $400 billion.
Participation
Despite the size of the market, 457(b) plans are not as widespread as they could be. All governments are eligible to sponsor them, but only 29,000 government plan sponsors do so. There are an estimated 7 million participants in 457(b) plans.
And the National Association of Government Defined Contribution Administrators, Inc. (NAGDCA) profiles governmental 4579b) plans thusly:
- median participation rate: 43%
- median account balance: $48,416
- median contribution amount $4,764
- median investment plus administrative fees: 0.44%
- median number of investments offered: 24
- auto-enrollment: 20% of plans
Distribution Channels and Sales Processes
Characteristics of the market of small entities include:
- mostly direct sales
- multiple provider
- bundled solutions
- captive advisors (company employees)
- affinity relationships
- procurement drives the process
- RFP clearly states what is up for bid
- consultants
- RPFs rarely bundle investments and recordkeeping together
- scoring system
- committee-driven decisionmaking process
- longer sales cycle
- union
- city management
457(b) Market Trends
Neese noted that the major trends affecting the 457(b) industry as a whole include:
- Recordkeeper consolidation
- Fee compression (Neese said that even though ERISA excessive fee lawsuits don’t apply, they are affecting fees in this market nonetheless)
- More cities and states evaluating and adopting hybrid DB/DC plans with a mandatory DC plan component
- More local governments purchasing retirement benefits through state-sponsored 457(b) plans
- Legislation and regulation
Neese also profiled the trends currently affecting investments and plan design in the 457(b) market:
Investments
- White labeling of funds (Neese said that this is becoming more common with funds of $1 billion or more)
- Streaming of menus
- Fee leveling/zero rebate funds
- Usage of CIT and separate accounts
- Custom TDFs
- Annuity products
- Investment advice
- Managed accounts
Neese observed that the market is moving quickly from accumulation to retirement income.
Plan Design
- Unbundled recordkeeping and investments
- Adoption of auto-suite
- Addition of Roth source
- Elimination of DB plans
- Financial wellness focus
Breaking into the Market
Neese suggested knowing the market before entering it and asking questions. He told attendees that the 457(b) market is underserved and that there is a “tremendous opportunity” to help participants by boosting their financial literacy.
