Many cities and special districts establish and maintain more 457(b) plans than they really need. We routinely see public agencies with as many as two, three or four 457(b) plans. How and why does this happen? And, are there any advantages or disadvantages to doing this?
The principal reason that public agencies maintain multiple 457(b) plans is because of the plans’ investments. Many, if not most, 457(b) plan vendors offer stable value fund (i.e., group annuity) investment options. The stable value fund option in most of these plans tends to be very popular with participants because it generally yields higher than short-term interest rates and appears to be a “safe” investment (one that is backed by the insurance company issuer, but not the federal government). It is not unusual to see plans with 30 to 50 percent of their assets invested in the stable value option.
The stable value option is highly profitable to the insurance company issuer, which needs to invest its stable value assets in longer-term investments. This is because, to provide the interest rate guarantees that participants find so attractive, the group variable annuity contracts that underlie these options always contain provisions that restrict or prevent plan sponsors (and the plan participants) from “cashing out” the investment and moving to another provider. We regularly see instances where a city or special district wishes to leave its current 457(b) provider, but “can’t afford to” because of the negative consequences of terminating its group annuity contract – its stable value option. In some cases, the city or special district wishes to switch to another 457(b) plan provider, but doesn’t want employees who are invested in the stable value option to lose their currently “guaranteed” return.
So, rather than terminating their stable value fund contract and suffering the investment consequences, many agencies simply leave their existing 457(b) in place – and just add another entire plan to the benefits mix. Although it is possible to maintain several 457(b) plans at the same time, this requires additional work and coordination. In most cases, your 457(b) record keeper will not take on, or assist you with, these responsibilities for another provider’s plan. It’s up to you to:
- Track and administer employee participation in more than one plan, including deferral elections, election changes, beneficiary designations, and timely deferral deposits,
- Select and monitor investment options for each plan,
- Make sure that fees and expenses paid from each plan are reasonable and appropriate,
- Not allow employees to exceed 457(b) overall deferral limits for a calendar year — the basic limit is $19,000 for 2019 and the age 50 catch-up limit is$6,000 for 2019 and
- Ensure that overall borrowing and loan limits are observed if participant loans are allowed.
There are ways to accommodate competing investment goals and administrative requirements in a single plan. If done thoughtfully, the “cost per participant” for a single large plan will be significantly less expensive than the costs of multiple redundant plans. If you have more than one 457(b) plan, you should carefully evaluate whether the “benefits” of maintaining multiple plans really outweigh the compliance and fiduciary burdens.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.