Byline: Tracey Westfield, Communications Associate
During the month of June, we are exploring the voluntary retirement plans (VRPs) offered to faculty and staff at the University of Missouri (UM). We will review one plan each Friday to help you make the best decision possible for your investment needs.
Most faculty and staff are familiar with their core retirement plan. The Retirement, Disability and Death Benefit Plan (RDD) and the Employee Retirement Investment Plan (ERIP) serve as the foundation of retirement savings for benefits-eligible faculty or staff. You can learn more about them on our Retirement Plans webpage.
What I want to focus on today is not the core retirement plans, however, but one of the university’s voluntary plans. UM offers three voluntary retirement plans: 401(a) Supplemental Retirement Plan, 403(b) and 457(b). Today, let’s talk about the 457(b) VRP.
What is the 457(b) plan?
A 457(b) plan is a retirement plan sponsored by governmental employers. Like other VRPs offered by the university, our 457(b) plan is “participant directed,” meaning an individual account is set up for you and you manage where your contributions and earnings are invested.
The 457(b) functions a little bit differently for employees hired in or after October 2012, in that they receive a match for some of the contributions made to a 457(b). Let me take a moment to explain how the 457(b) plan differs for:
- those employees who were hired before October 2012—i.e., employees who are in the RDD core retirement plan vs.
- employees hired in or after October 2012—i.e., those in ERIP.
How the 457(b) functions for employees in the RDD plan
The majority of university employees are members of the RDD core retirement plan. For these employees, the 457(b) is a VRP with no match from the university. The 457(b) is the same as the 401(a) or the 403(b) in this respect. You are immediately 100 percent vested in your contributions. Vested means you get to keep the money.
How the 457(b) functions for employees in ERIP
Benefit-eligible employees hired in or after October 2012 have ERIP as their core retirement plan, as opposed to the RDD plan. Also, those employees rehired in or after October 2012 who were not vested when they left—or who were vested when they left and took a distribution of their benefit—are enrolled in ERIP.
Under ERIP, the university automatically contributes 2 percent of your salary to a 401(a) account. In addition, the university will match your contributions to the 457(b) up to an additional 3 percent of your salary. In total, you can receive a maximum university-paid contribution of 5 percent of your salary.
Let’s look at an example to help make things clearer. In the following example, a hypothetical faculty of staff member is in ERIP and has elected to contribute 3 percent of his or her salary to retirement.
|ERIP contributions: hypothetical illustration based on an annual salary of $50,000|
|Contribution Type||% of Salary||Annual Contribution|
|UM base contribution to 401(a)||2%||$1,000|
|Employee contribution to 457(b)||3%||$1,500|
|UM matching contribution to 401(a)||3%||$1,500|
As shown in this example, the university-paid contributions are deposited in an individual 401(a) account specifically for you that you manage. On the other hand, your employee-paid contributions are deposited in a 457(b) account.
In order to maximize your university match, you are enrolled in the default contribution rate of 3 percent of your salary. You may change this default; but if you do nothing, then you will find yourself with a 457(b) account even though you didn’t take any deliberate steps to set one up.
You are immediately 100 percent vested in the employee-paid contributions that you make. Vested means you get to keep the money. On the other hand, the university-paid matching contributions are not vested until you have accumulated three years of creditable service.
Regardless of whether you are in the RDD or ERIP plan
You can choose to use the 457(b) plan for all of your retirement contributions, or you can mix and match with other VRPs offered by the university. And, you can contribute from 1 percent to a larger portion of your pay.
A few key attributes set our VRPs apart from one another:
- When you are taxed
- Annual contribution limits
- Who is eligible
- When you can make withdrawals
- When contribution changes take effect
In this article, I’ll discuss each of these attributes as they relate to the 457(b), but another great resource is the “UM Voluntary Retirement Plans (VRP) Highlights” chart, available as a PDF on the Total Rewards website.
When is the 457(b) plan taxed?
This is a pretax plan, meaning you pay no income taxes on any contributions or investment earnings until you make a withdrawal. This reduces the amount of federal income taxes, and in most cases state income taxes, you owe in the years that you are contributing.
How much can I contribute to a 457(b) plan?
The IRS limits annual contributions. The limit is $17,500 in 2014. If you are age 50 or older, you can choose to contribute an additional “catch up” amount to add to your retirement savings. In 2014, the amount is $5,500.
Who is eligible to participate in a 457(b) voluntary plan at UM?
Any faculty or staff member, except someone in a student appointment, is eligible to establish a 457(b) VRP. Contrary to UM’s core retirement plans, you do not have to be considered benefit-eligible to participate in the 457(b) (though as I mentioned before, only ERIP enrollees are eligible for any kind of match from the university). Plus, you can sign up the very first day of your employment.
When can I make withdrawals from the plan?
You can make withdrawals at age 70½—or earlier should your employment end with the university.
If I make changes to my 457(b) contributions, when do they take place?
You can change your contributions at any time, and the changes will be processed on the next available payroll period, but no sooner than the first of the following month.
Does UM contribute to my 457(b) plan?
As explained previously, for employees in the RDD plan, the university does not contribute to your 457(b) plan.
For employees in ERIP, the university will match contributions that you make to your 457(b) account up to 3 percent of your salary. But remember, university contributions are put into a 401(a) account—in other words, the matching contributions are deposited into a different account than the one where your employee-paid contributions are going. Also, anything you contribute to the 457(b) plan above and beyond 3 percent of your salary is not matched by the university.
Why would I choose the 457(b) plan over the other VRPs UM offers?
It is impossible to recommend one plan over another since every person’s retirement goals and financial situation are different. My best advice is to schedule a one-on-one consultation with a Fidelity Investments retirement representative. (Fidelity administers the three voluntary retirement plans.)
Each Friday this month, we will explore the voluntary retirement plans: 401(a) supplemental plan, 403(b) and 457(b). Be sure to subscribe to our blog to have these valuable articles brought directly to your inbox! Go to the blog’s homepage, and use the “Subscribe” field on the right-hand side.
- Start contributing now—or manage your existing account—using UM’s Voluntary Retirement Plans portal, from Fidelity.
- Schedule a one-on-one consultation with a retirement representative.
- Read the previous June 6 overview, which is the first article of this VRP series.
- Download our info sheet “UM Voluntary Retirement Plans (VRP) Highlights” (PDF).
- More UM retirement plan info.
- Learn more about our 457(b) plan administrator: Fidelity.