Summer 2006

New Study Examines Public Sector 457 Plans

Author: Mary Willett, Willett Consulting In March 2006, Nationwide Retirement Education Institute published its second report – “America’s Retirement Voice -Trends in Public Sector Retirement Plans” - that examines statistics and trends in state and local government deferred compensation plans, and provides comparisons to private sector 401(k) plans. This article discusses some of the information from this study.

Over the past two years, participants in state and local government 457 deferred compensation plans have increased average annual deferrals by 8%, improved the diversification of their account balance and increased the use of lifestyle and lifecycle investment options. These positive trends, and more, are discussed in the recent report from Nationwide Retirement Solutionsi – “Trends in Public Sector Retirement Plans.” 1

The data and findings within the Report also point to some areas where continued educational focus should be directed to ensure state and local government employees are financially prepared for their retirement futures. For example, participation rates of eligible employees are increasing from an estimated average of 30% in 2003 to 34% in 2005. This rate continues to be considerably less than private sector 401(k) participation which averages 70% of eligible employees. Although this may be attributed to the fact that 457 plans are supplemental benefits and state and local government employees are typically covered by a primary pension plan, most employers will agree that increasing employee participation is a priority.

Over the past two years, the average annual contribution to the 457 plan has increased 8% to $3,800. This is just slightly lower than the average private sector deferral level of $3,950. However, there continues to be a significant disparity between the average 457 deferral by male and female participants, with annual contributions being $4,200 and $3,300 respectively. A positive finding is that the percentage change in deferrals by female participants during this two year period increased by 9.5% compared to a 7.6% increase for male participants.

One of the most dramatic improvements in 457 plans has been in asset diversification. In 2005, almost four in ten participants were invested in three or more asset classes, compared to one in ten in 1999. For younger participants, such as those aged 35 and under, almost half are now diversifying their 457 accounts among three or more asset classes. Although this trend is positive, there still is a ways to go before diversification in public sector plans compares favorably to private sector 401(k) plans, where almost seven in ten participants invest in three or more asset classes.

As more employers add lifecycle or lifestyle funds to their investment line-up, these new asset allocation funds appear to be providing participants with an easy choice for diversifying their account. This is particularly true for younger employees as demonstrated by statistics on participants under age 25 that show:

    • Almost half are investing their 457 accounts in three or more asset classes (up from 30% in 2003)
    • Almost one-third of their total 2005 deferrals were directed into an asset allocation fund (up from 16% in 2003)
    • Almost three in ten use an asset allocation fund as their single investment choice (up from 10% in 2003)
Statistics show similar improvements in diversification and the use of asset allocation funds for all other age groups over the past two years, just not as significant. This suggests that education efforts are effective to help participants understand the importance of diversification, but it is easier to reach younger employees, such as at the time of enrollment, to provide this message.

The Nationwide Report, which can be accessed through their Web site (at www.nrsforu.com), includes many more participation statistics and findings as well as information on other studies that have been conducted on various topics, including employee attitudes about money, investing, and customer service preferences. It also includes information on trends in employee health and pension benefits, phased retirement, automatic enrollment, investment guidance and advice and more.

Understanding how employees use, or don’t use, their 457 plan as well as what is new in the defined contribution industry can be extremely useful to state and local government employers as they develop new educational programs or enhance their plan design to better meet their workforce needs today and into the future.

Mary Willett, Willett Consulting, CRA, CRC, has more than twenty years experience in the field of public employee retirement benefits. She currently is the project manager for the InFRE Retirement Readiness Study that is being conducted with the Federal government to create a retirement readiness index and also serves on the InFRE Board of Standards. Willett is working with Nationwide Retirement Solutions to develop educational programs and material for the public sector plan sponsor community and chairs the Panel of Advisors of the Nationwide Retirement Education Institute. Prior to her current role as a benefit plan consultant, Willett was Director of the State of Wisconsin Deferred Compensation Plan and the 2001-2002 President of the National Association of Government Defined Contribution Administrators (NAGDCA).



1 The report “Trends in Public Sector Retirement” can be found on the Nationwide Retirement Solutions Web site at www.nrsforu.com in the Employer section under the Nationwide Retirement Education Institute tab. The first report, that was published in 2004 entitled “Public Sector Retirement: Yesterday, Today and Tomorrow” can also be found here.