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| 1. What is a 457 plan? | |
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A 457 plan is an employer-sponsored deferred compensation program that lets you defer part of your paycheck toward your retirement savings while at the same time delaying paying taxes on that income.
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457 plans are generally offered by state and local governmental entities or tax-exempt organizations.
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457 plans offered by state and local governmental entities (governmental or public-sector 457(b) plans) generally operate similar to 401(k) plans. Plans for tax-exempt organizations (tax-exempt 457(b) plans) are limited to upper management and have different rules for eligibility, vesting, and distributions. If you work for a tax-exempt organization, you should consult your human resources or benefits representative for details about your plan.
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Another type of plan, the 457(f), is generally offered only to very senior management at tax-exempt organizations. Essentially, it works like this: the employee receives an agreed sum of money only after completing specified tasks and/or remaining with the employer for a specified period of time.
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| 2. Is a 457 plan the same as a 401(k) plan? | |
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No. Both involve salary-deferral arrangements, but 457 plans are not subject to certain requirements for reporting, disclosure, and discrimination testing by the employer. 401(k) plans, on the other hand, are always subject to disclosure, reporting and fiduciary requirements under the Employee Retirement Income Security Act (ERISA).
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| 3. What happens to my 457 plan if I switch jobs? | |
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If you are an employee of a state or local government, you may transfer the money into your new employer's 401(k), 403(b), or governmental 457(b) plan, if it accepts transfers, or into an IRA. Other options if you leave your job are to withdraw the money (in this case you will owe income tax on the full amount) or leave it where it is until you retire (in this case you must begin to withdraw funds at age 70 1/2).
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If you are an employee of a tax-exempt organization, you may transfer your 457(b) to another tax-exempt organization's 457(b) plan if it accepts transfers, but you may not roll over your account into an IRA or another type of employer-sponsored retirement plan. Check with your employer's human resources or benefits representative for details.
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| 4. What are my rights as a 457 plan participant? | |
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Many states have their own requirements for the type of benefits information that must be provided to employees in state and local governmental plans. The required disclosures will typically include information about plan eligibility, participation procedures, funding information, and distribution requirements.
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| 5. What kinds of investment choices do I have with a 457 plan? | |
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Depending on the structure of your plan and what your employer decides, you may have a variety of investment choices.
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Most likely, these would include growth-oriented investments such as stock funds, income-generating portfolios such as bond funds, and funds that balance these two approaches. You will probably also have a money market option that offers the highest level of security, but less potential for growth.
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| 6. Is my 457 money guaranteed by any federal agency? | |
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While funds in governmental plans must be held in trust for the exclusive benefit of participants and their beneficiaries, there is no guarantee of any specific investment return or any guarantee against loss, and they are not totally protected from creditors.
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Funds in plans of tax-exempt organizations remain part of the employer's assets until they are distributed to the employee.
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| 7. How do catch-up contributions work? | |
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There are two types of catch-up contributions, each with its own eligibility requirements. One type has been available for years, while the other became available in 2002. You can make one type of catch-up contribution to your 457 in a given year.
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If you are within three years of retirement and have not taken full advantage of your 457 plan in the past, you may make the traditional type of catch-up contribution. In this case, you may contribute as much as your normal limit for the year plus unused amounts from prior years, up to a maximum contribution of $ for .
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Under the new catch-up contribution rules, if you turn 50 or older in you may contribute up to $ in addition to your regular contribution if your plan allows. This type of catch-up contribution is only permitted in governmental 457(b) plans, and not tax-exempt 457(b)s. You can only make one type of catch-up contribution to your governmental 457(b) in a given year.
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| 8. Who is in charge of my 457 plan? | |
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Your employer has contracted with a plan administrator to handle such matters as enrollment and to interpret the rules for you. The administrator may hire a plan agent, a separate subcontractor, who will provide information on your investment options. Generally, the person in charge of human resources or benefits at your employer will be able to tell you whom to contact with your questions.
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