August 10, 2006

Enhance your employee benefits package with a 457(b) Plan

Whether you're a public or private (tax-exempt) institution, adding a 457(b) Deferred Compensation Plan to your benefits package can be a great way to enhance your employees' retirement savings opportunities.

The Basics
457(b) plans are nonqualified, tax-deferred compensation plans that look and feel very much like other types of retirement or tax-deferred annuity plans, such as 403(b) and 401(k) plans, and offer many of the same tax advantages to employees. Just like the other plans, employees who participate in a 457(b) Plan are able to set aside a portion of their salary on a before-tax basis.

Employee Eligibility
This is based on your institution type:

• Public institutions (governmental and state employers) may extend eligibility to a broad-based group of employees, if desired.
• Employers of private institutions (501(c) tax-exempt organizations) may extend participation solely to a select group of management or highly compensated employees.

Comparing 457(b) plans with 403(b) and 401(k) plans
Each plan has advantages. Participants do not pay any federal income taxes on the amounts they contribute, or on any earnings on the amounts they contribute, until the funds are withdrawn from the plan (state and local taxes are usually deferred until withdrawal).

But when a 457(b) plan is offered alongside a 403(b) or a 401(k) plan, your employees gain considerable choice. Employees have the discretion to choose one plan over the other, or contribute the maximum amount permitted by law to both.

In addition, there are distinct differences between 457(b) plans and 403(b) or 401(k) plans that may appeal to your employees. For example, contributions and earnings in the 457(b) plan are available for withdrawal, penalty free, upon separation from service, even before age 59? (except for amounts rolled over to the 457(b) plan from other plan types). Withdrawals from 403(b) and 401(k) plans are not penalty free if made before age 59? (age 55 if separated from service) ? an early withdrawal penalty of 10% may apply on withdrawals from a 403(b) or a 401(k) plan in addition to ordinary income tax.

To compare a broad range of the features and benefits available under public and private 457(b) plans with those applicable to 403(b) and 401(k) and other qualified plans, use our Plan Comparison Chart.

More is better, thanks to EGTRRA
Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, employees who contributed to a 457(b) plan and a 403(b) or 401(k) plan were limited to a combined maximum contribution of $8,500, rather than the higher contribution limits generally available for 403(b) and 401(k) plans.

As a result of EGTRRA, the dollar offset between 457(b) plans and 403(b) and 401(k) plans was eliminated, allowing employees to contribute the maximum amount available under both plans. Today, an employee who is eligible to participate in both a 403(b) and 457(b) plan can contribute as much as $28,000 (in 2005). Moreover, individuals who qualify for the additional catch-up provisions applicable to these plans may be able to contribute an even greater total amount.

This protects a sizeable chunk of earnings from current taxation.

EGTRRA also enhanced portability between 457(b) and other defined contribution plans.

The Impact of additional savings over time
The table below compares two individuals, John and Diane. John participates in his employer's 403(b) plan, while Diane's employer offers a 403(b) plan and a 457(b) plan, allowing her to contribute to both each year.

Assuming contributions of $14,000 per year over a 30-year period, and an average annual return of 6%, John's participation in the 403(b) plan would result in an accumulation of approximately $1.1 million.

Assuming Diane contributes the same amount over the same time period and also earns a 6% average annual rate of return, she would wind up with the same accumulation of $1.1 million in her 403(b) plan. But because Diane's employer also sponsors a 457(b) plan, she has the opportunity to make additional pre-tax deferrals each year (in this example, we have assumed that Diane makes an annual contribution of $5,000 to the 457(b) plan over the same 30 year period).

The result: Diane's total accumulation in both plans after 30 years is $1.5 million - 35% more than John was able to accumulate.

What's more, the 457(b) accumulation would be available to Diane, penalty free, when she terminates employment ? even if she's under the age of 55.

Investments
Participants in a 457(b) Plan can generally allocate their contributions into a variety of investment choices. Account transfers and allocation changes can be made with no tax implications.

How to Get Started
To speak to a TIAA-CREF Consultant about sponsoring a 457(b) plan, contact the Administrator Telephone Center toll-free at 888 842-7782, Monday through Friday, between 8:00 a.m. and 8:00 p.m. ET.

Public plan sponsors mention plan code: 457 - 199
Private plan sponsors mention plan code: 457 - 200