457(b) Deferred Compensation Plan
Defined Contribution Plans
A 457(b) Plan is a define contribution plan. Similar to a 401(k) or IRA, a participant knows how much they are contributing (the contribution is defined); however, they do not know how much they will receive in the future. Future distributions will vary subject to the account's rate of return and how long the participant lives. In a defined contribution plan, the participant assumes the investment and mortality risk.
This type of plan varies from your Pension Plan, which is a defined benefit plan. In a defined benefit plan, participants know what income they will receive in the future; however, the employer does not know how much they need to contribute. Employer contributions will vary based upon the plan's investment return and the mortality rate of the participants. In a defined benefit plan, the employer assumes the investment and mortality risks.
Another key difference between the types of plans is that in retirement you control the distribution options in a defined contribution plan, where a pension plan usually pays benefits as lifetime income in monthly payments. Some pension plans may offer a lump sum distribution of a portion of the account value upon retirement before monthly payments begin. After monthly payments begin, pension plans usually do not allow for additional draws on the balance; therefore, a define contribution plan can complement a pension plan in retirement. The pension plan will provide lifetime income and the defined contribution plan can provide discretionary income for large expenses or to supplement your monthly income.
A Unique Aspect of 457(b) Plans
Unlike most retirement accounts, such as 401(k)'s and IRA's, 457(b) plans are not subject to the IRS's 10% Early Withdraw Penalty for distributions made before age 59 1/2. For employees who participate in the Plan and leave Dauphin County's employment prior to age 59 1/2, they should consider this when deciding whether to leave their money in the Plan or roll it into another retirement plan option. Participants may leave their money in the Plan if they maintain a balance of $5,000 or more. Should a participant roll their 457(b) assets into another type of account, such as an IRA or 401(k), the money will assume the tax identity of the new account and be subject to the IRS 10% Early Withdraw Penalty.
Plan Highlights and Summary Plan Description
The plan highlights provides very basic information on the plan and how to access additional information, while the summary plan description provides more detail regarding the plan and its provisions.