LANSING, Mich. – Changes in the Economic Growth and Tax Reconciliation Act of 2001 affecting 457 plans, are keeping credit unions serving state and local government employees busy keeping members informed about understanding how the new law impacts them and their retirement plans. Maximum contributions to 457 plans, which are the equivalent of 401(k) plans in the private sector, will increase next year to $11,000 from the current $8,500, then go up $1,000 each year until 2006. There are also new rollover options making it easier to transfer savings from one tax-favored plan to another. Changes like this are keeping Russ Steiner and Chad Houson, Members Financial Services representatives at State Employees Credit Union here, busy holding seminars and working with the SECU marketing department to help members understand how they’re affected by the new provisions of the law. “Michigan has a 457 plan as part of (state employee) retirement,” Steiner explains. “A lot of individuals, especially those retiring or approaching retirement, are wondering about the new tax laws and the ability to roll from a 457 into an IRA. They have a lot of questions about which options are best for them.” Members are also asking about catch-up provisions for people over 50 years old. They can put an additional $1,000 into their 457 plans next year. Then during the three years immediately prior to retirement they can sock away twice the usual amount. In 2002, that will mean $11,000 plus another $11,000. “It allows you to put in an enormous amount of money,” Steiner says. “For those individuals trying to play catch-up in their later years, not being able to put away enough money is no longer going to be a problem.” What does all this mean to credit unions serving public employees who qualify for 457 plans? “If a credit union wants to be the members’ primary financial institution, they are going to have to be proactive. There are other brokers and financial institutions out there that are going to be marketing business to these people. “We can’t advise on how their particular 457 retirement plan is administered. That is up to the custodian of the plan. But we can advise on how that plan fits into their overall retirement picture,” Steiner says. He points out that although the new federal law allows state and local governments to change their 457 plans, it’s up to each individual governmental unit to amend its plan to accept these changes. That means a credit union that wants to guide its members must not only become familiar with the federal law but also keep on top of what’s happening with the state or local government plan. For example, in Michigan, 457 distributions are taxed by the state. IRA distributions are not. So a state employee who rolls a 457 into an IRA upon retirement avoids a tax hit. To keep on top of the latest 457 details, Steiner and Houson have been in regular contact with the State Office of Retirement Benefits. They’ve relayed information to members by holding at least a dozen seminars – “and the law hasn’t even taken effect,” Steiner notes. “They’ve all been well attended.” “Much of our time since about the beginning of September has been spent on this project. The bottom line is if you establish a relationship with a financial advisor at the age of 30 or 40, and don’t retire until 60 or 65, you have a track record of working with that individual. You’ll feel comfortable with that rollover option.” So it’s important, Steiner notes, for a credit union to reach out to all age groups who may have a 457. A member may face important decisions well before retirement. For example, perhaps a state or local employee begins contributing to a 457 in their 30s. When they’re 45, they accept an offer from a private employer and need advice on a rollover. Robert Barkin at ICMA Retirement Corp., Washington, D.C., says 90% of state and local governments offer 457 plans. However, only 30% of eligible employees participate. Barkin suggests one reason may be that in the public sector many employees are covered by defined benefit plans, so 457s are supplemental. “Getting the word out that these (457 plans) are a good way to save is part of the challenge,” he says. “Even so, they’re still widely used and widely appreciated. The changes in the law will make them even better.” Just as 457 plans affecting state and local government employees are changing, credit union members in the federal government and military service are also seeing changes in the Thrift Savings Plan, the federal government’s version of a 401(k). New investment options have been added to the program. Perhaps the most significant change was opening the TSP to members of the military in October this year. As of June 30, 2001, TSP assets already totaled nearly $100 billion. The addition of the military could potentially double the program, according to the Federal Retirement Thrift Investment Board. -

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