|At the May 15 Special Board Meeting, Retirement Horizons presented their analysis of The Township Retirement Plans as compared to the Texas Municipal Retirement System Plan. RHI offered four suggested changes to the current Township retirement plans, and the Board asked staff to research two of the four options:
• Limiting participant loans to employee monies only
• Providing a Group Annuity Option for plan participants
Limiting Participant Loans
Employees who participate in the Township’s retirement plan make contributions into the 457b plan. These contributions are matched by The Township and Township contributions are made into the 401a plan. Employees may take loans from the vested portion of the 401a plan and re-pay the loan through payroll deductions with interest. Employees may borrow up to 50% of their vested balance and the maximum dollar amount is limited to $50,000. Employees do not have access to any Township monies until they become vested – either through a loan or a distribution upon retirement.
The retirement plan documents can be amended to discontinue loans from the 401a plan, and to allow loans from the 457b plan. The average participant balance in the 457b plan is lower than the average participant balance in the 401a plan. This difference is primarily due to the 457b plan only being in existence since 2010; employee plan balances from the former 401k plan were transferred into the 401a plan and included both employee and employer contributions. The average participant balance in the 457b plan is $21,744.63 and the average vested participant balance in the 401a plan is $68,337.92.
Hardship withdrawals are allowed in the 401a plan document. An employee must show a severe need for the withdrawal, and their contributions are suspended for six months after taking a hardship withdrawal. Hardship withdrawals are considered a protected benefit under ERISA, and staff recommends these withdrawals are allowed to continue from the 401a plan.
If the plan documents are amended to only allow loans from the 457b plan balances, it is staff’s belief that employee participation in the 457b and 401a plans will diminish from the current 93% participation rate.
Group Annuity Option
Currently, Principal offers a fixed period installment and a fixed payment installment option to participants upon retirement. The fixed period installment option provides equal payments over a fixed period, while the fixed payment installment option provides a specified dollar amount each year. Employees may also take a lump-sum distribution at retirement and use the funds to purchase an annuity outside of the plan.
Plans that provide group annuity options have been subject to regulation requirements which in turn have increased costs and were administratively burdensome. Staff asked Gallagher Retirement Services for their recommendation related to annuities, and their advice follows:
Employers generally have been hesitant to offer annuities in their defined contribution plans due to regulatory barriers, which increased costs and were administratively burdensome (spousal consent and disclosure requirements). Over the past few years, the Treasury and IRS had released proposed regulations and guidance relating to the offering of annuities in defined contribution plans and the purchase of longevity annuity contracts under tax-qualified defined contribution plans, Section 403(b) plans, IRAs and eligible governmental Section 457 plans, and compliance with the required minimum distribution (RMD) rules for such contracts.
Just this past week, on July 1, 2014, the IRS released final regulations relating to the use of longevity annuity contracts under tax-qualified defined contribution plans, Section 403(b) plans, IRAs and eligible governmental Section 457 plans. The regulations provide guidance necessary to comply with the required minimum distribution (RMD) rules for an IRA or plan that holds longevity annuity contracts. These final regulations modify the RMD rules to facilitate the purchase of longevity annuities that begin at an advanced age. A longevity annuity is an income stream that is scheduled to commence at an age in the future and that continues as long as the individual lives, for example, an annuity under which payments begin at age 80 or 85. These annuity contracts are referred to in the final regulations as qualifying longevity annuity contracts (QLACs). Insurance companies also may begin to offer QLAC products now that the regulations are finalized. Individuals also may welcome the Return of Premium (ROP) feature since for QLACs that offer this feature, if an individual dies before receiving an annuity, the original premium can be returned to the individual's heirs.
Overall, these final regulations should allow retirement plans to more easily offer their participants annuity options, which will give participants a wider range of choices in how they receive their benefits and help them better plan for their retirement. Because the final regulations have just been released, it is recommended The Woodlands Township wait and evaluate the annuity industry in 9 - 12 months to gauge products, services and costs in response to these new regulations.
In the meantime, the current 401(a) and 457(b) plans within the Principal Financial Group platform allows for distributions to be paid in the following manner:
The automatic form of benefit is a single-sum payment. The Participant has the option to take this lump sum distribution from the plan and use the funds to purchase an annuity outside of the plan. Additionally, the Participant can choose other optional forms such as:
• A fixed period installment option – whereby the Participant elects to receive substantially equal annual payments over a fixed period of whole years. The annual payment may be paid in annual, semi-annual, quarterly, or monthly installments.
• A fixed payment installment option – whereby the Participant elects to receive a specified dollar amount each year. The annual payment may be paid in annual, semi-annual, quarterly, or monthly installments.
Julie A. Otermat, AIF®, PRP™
Regional Director - Client Relationship Consulting
Investment Advisor Representative
Retirement Plan Consulting
Arthur J. Gallagher & Co.
If changes are made to the 457b or 401a plan document, participants are required to receive at least 45 days’ notice of any plan amendment changes. If the Board desires to amend the retirement plan documents, the effective date of these changes will be October 1, 2014.