Public Employee Retirement Plans Afforded New Protection
Like many people his age, Greg Yacoubian is actively saving for retirement. But the 37-year-old father of three hasn’t contributed to his employer’s tax-favored retirement plan--arguably the most cost-effective way to save--because he’s worried that the money won’t be there when he retires.
While most employer-sponsored retirement plans are perfectly secure, Yacoubian has a rationale for his concern. He’s a Los Angeles police officer, which means he’s a public employee. And the nation’s tax laws have not defined certain public employee retirement programs, called 457 plans, with the same protections afforded private-sector plans.
But that’s changing. Inspired in part by Orange County’s borrowing from 457 plans during its financial crisis, a little-noticed provision in the recently enacted minimum wage law will make 457 plans a little more like 401(k)s.
The law, passed in August, requires that all newly established 457 plans put employee retirement contributions into a custodial account, a trust or an annuity contract--accounts that can’t be easily accessed by anyone but the participant. And it requires that the money in the plan be held solely for the benefit of the participants, says George D. Webb II, principal at William M. Mercer Inc. in Baltimore.
Existing plans must shift employee retirement contributions into a trust by Jan. 1, 1999.
Although 457 plans are funded by employees, the money was legally the property of the government agency that sponsors the plan. Cities and states that sponsor these programs had the right to use worker retirement dollars to handle the government’s day-to-day financial obligations.
Workers who contributed to the 457 plan simply had a contractual promise from their employer that the employer would pay back the money workers set aside once they hit retirement.
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In fact, when Orange County declared bankruptcy two years ago, the risks of these government retirement plans were revealed. In a gesture of goodwill, the financially strapped county said it would guarantee workers that no more than 10% of their retirement funds would be used to pay general obligations of the government.
Later, that 10% was restored--plus interest, says John L. Amsden, partner at Hennigan, Mercer & Bennett, an Orange County law firm that helped structure the deal.
Nonetheless, the damage was done.
“There was always lingering in the background this concern about ownership. Some workers wouldn’t contribute because of it,” says Webb. “But Orange County focused the attention of most of the industry. People looked at this and said: ‘My God. Look at what could happen.’ ”
If they weren’t aware of it before, government employees suddenly recognized that their money was at risk. And a good number opted to stop contributing or to simply never start, experts say.
Indeed, many blame the ownership issue for the historically sorry contribution rates into these plans. Where roughly 75% of those who can contribute to 401(k) plans do, only about 22% of public employees eligible for 457 plans contribute to them, says Adam Parfitt, program associate with the National Assn. of Government Deferred Compensation Administrators in Lexington, Ky.
However, it is possible that some public employees feel less of a need to contribute to such plans because their regular public pension plans tend to be more generous than private ones--when private companies even have a standard pension plan separate from a 401(k).
In addition to adding security to these plans, the new law will make a series of changes that will make these programs more attractive.
Among other things, annual contribution maximums, which are currently set at $7,500, will be indexed for inflation--just as they are with 401(k) plans.
The law has also created a formula for handling nonemergency withdrawals. Currently, the only way to take money out of a 457 plan is to have an unexpected emergency. Many 401(k) programs allow participants to tap their retirement savings accounts to purchase a home or handle other debts, but with a 457 plan, active participants could withdraw money only if they had been hit with a medical emergency or another unexpected financial disaster.
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Finally, the law also changes a complicated benefit formula that restricted the amount retirees could pull out of these plans. And it allows former workers to alter the date on which they get their money, adding another modicum of flexibility to what was once a highly inflexible arrangement.
For Yacoubian and other public workers, it’s a welcome shift.
“If it changes, I’ll definitely contribute,” he says. “Now I’m just saving money in taxable accounts. I know that’s not the best way to do it, but it’s the best option I have.”
Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kathy.kristof@latimes.com on the Internet.
