What Is a 457 Plan and How Does It Work?

A 457 plan is a type of tax-deferred retirement plan available to employees of state and local governments and some non-profit organizations. Named after the relevant section of the Internal Revenue Code, these plans allow eligible employees to set aside a portion of their income for retirement on a pre-tax basis.

Unlike other retirement plans, 457 plans have some unique characteristics. One key difference is that early withdrawal penalties (the typical 10% tax applied to early withdrawals from other retirement accounts) don't apply to 457 plans. However, regular income taxes are still due upon withdrawal. Participants can typically begin taking distributions once they leave their employer, regardless of age, or when they reach age 72 due to Required Minimum Distribution (RMD) rules.

457 plans come in two main varieties: 457(b) plans for governmental and non-profit employers, and 457(f) plans, which are less common and designed for highly compensated employees at non-profits. For most public sector employees, the 457(b) plan is what they'll encounter as part of their benefits package.

Core Components of 457 Plan Administration

Effective 457 plan administration requires attention to several key components. First, plan document maintenance is essential—administrators must ensure that plan documents remain current with changing regulations and organizational needs. These documents establish contribution limits, eligibility requirements, and distribution options.

Enrollment processes form another critical component. Administrators need to implement streamlined procedures for new employees to join the plan, including clear communication about contribution options and investment choices. Automatic enrollment features, where permitted, can significantly increase participation rates.

The contribution management aspect involves accurately calculating, collecting, and depositing employee deferrals within the timeframe required by regulations. This includes monitoring to ensure participants don't exceed annual contribution limits, which for 2023 allow participants to contribute up to $22,500, with additional catch-up provisions for those over 50.

Investment oversight represents another crucial responsibility. Plan administrators must select and regularly review investment options, ensuring they remain appropriate for participants' retirement needs. This typically involves working with financial advisors to evaluate fund performance, fees, and risk profiles.

Provider Comparison for 457 Plan Administration Services

When selecting a provider for 457 plan administration, several factors should be considered, including fee structures, investment options, technology platforms, and participant support services. Here's a comparison of some leading providers:

Provider Key Features Technology Support Services
Voya Financial Comprehensive recordkeeping, diverse investment options Mobile app, online account management Financial wellness programs, education resources
Empower Retirement Integrated platform, robust reporting tools Advanced digital experience, retirement income calculator One-on-one counseling, webinars
MissionSquare Retirement Public sector specialization, compliance expertise Participant portal, educational tools Dedicated representatives, retirement planning services
TIAA Lifetime income options, ESG investments Retirement advisor platform, financial planning tools Retirement consultants, workshops

Each provider offers distinct advantages. Voya Financial is known for its comprehensive recordkeeping services and financial wellness programs. Empower Retirement provides an integrated platform with strong digital capabilities. MissionSquare Retirement (formerly ICMA-RC) specializes in public sector plans with deep compliance expertise. TIAA offers unique lifetime income options particularly valuable for long-term planning.

Benefits and Challenges of 457 Plan Administration

Administering a 457 plan offers several notable benefits. First, these plans provide valuable recruitment and retention tools for public sector employers competing for talent. Well-administered plans demonstrate organizational commitment to employee financial well-being.

Another advantage is participant financial security. When properly managed, 457 plans help public employees build retirement savings that complement pension benefits, creating more secure retirement outcomes. The National Association of Government Defined Contribution Administrators reports that employees with access to well-run 457 plans typically achieve higher retirement readiness scores.

However, administrators face significant challenges. Regulatory compliance remains complex, with IRS rules governing contribution limits, distribution requirements, and non-discrimination testing. The Internal Revenue Service periodically updates these regulations, requiring administrators to stay current.

Technology integration presents another hurdle. Systems must efficiently handle enrollment, contributions, investment elections, and distributions while providing clear reporting and security. PlanSponsor research indicates that outdated technology remains a common pain point for plan administrators.

Additionally, participant education requires significant resources. Many employees struggle to understand investment concepts, contribution strategies, and distribution options. Effective education programs must address diverse financial literacy levels and changing workforce demographics.

Cost Considerations and Fee Structures

Understanding the cost structure of 457 plan administration is essential for both employers and participants. Several fee categories typically apply to these plans:

Administrative fees cover basic recordkeeping, compliance testing, and plan document services. These may be charged as a percentage of assets (typically 0.1% to 0.5%) or as a flat fee per participant (ranging from $50 to $200 annually). Larger plans generally secure more favorable fee arrangements due to economies of scale.

Investment management fees represent the largest expense component for most plans. These fees, charged by investment providers, vary significantly based on investment types. Passive index funds might charge as little as 0.02% to 0.2%, while actively managed funds typically range from 0.5% to over 1% annually. Morningstar research consistently shows that fees significantly impact long-term investment returns.

Some plans also include advisory fees for services provided by financial advisors or consultants. These may be structured as asset-based fees (typically 0.25% to 1%) or flat retainer arrangements. Fi360 surveys indicate that fee transparency has improved in recent years, but participants often remain unaware of the total costs they bear.

Plan sponsors should regularly benchmark fees against comparable plans to ensure they remain competitive. The Department of Labor, while not directly regulating governmental 457 plans, provides useful guidance on fee evaluation that many public sector employers voluntarily follow as a best practice.

Conclusion

Effective 457 plan administration requires balancing regulatory compliance with participant needs and cost considerations. As retirement planning becomes increasingly important for public sector employees, the quality of plan administration directly impacts participant outcomes. By selecting appropriate service providers, leveraging technology solutions, and implementing strong educational programs, plan sponsors can create retirement programs that truly serve their employees' long-term financial needs.

Whether you're a plan administrator looking to improve your current processes or an employer considering establishing a new plan, focusing on these core elements will help ensure your 457 plan achieves its intended purpose: helping public servants build secure financial futures. Regular review of plan performance, fee structures, and participant satisfaction will keep your program aligned with evolving best practices in the retirement plan industry.

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This content was written by AI and reviewed by a human for quality and compliance.