HomeMy WebLinkAbout2000-02-16 Agenda Packet - Board (15) TDPUD STAFF REPORT
February 9, 2000
To: Board of Directors
From: Peter L. Holzmeister
Subject: Discussion of 401(a) retirement plan option
AGENDA # /D
We have talked about the possibility of converting the District's current 457 deferred
compensation plan to a 401(a) plan. When we have discussed this in the past several questions
came up that I was unable to answer. The Directors expressed an interest in having an expert
make a presentation to improve our understanding of the differences between a 457, a 401(a),
and the current defined benefit pension plan.
To that end I have invited Lisa Lattyak of the ICMA Retirement Corporation to attend our
meeting on Wednesday. She will give a presentation on the 401(a) plan and how it differs from
the other options. She will then answer questions.
This is a complicated subject. To help you organize your thoughts for the meeting I will offer you
a few thoughts.
Defined benefit plan: Our union employees currently have a defined benefit plan. The benefit
they get at retirement is determined by a formula that takes into consideration the number of
years they worked here and their salary. If they work here for 20 years they get a retirement
equal to 40% of their highest pay when they reach age 65. If they work longer they get more. If
they work less they get less. If they retire earlier than 65 they get less. If they work beyond 65
they get more. It is all determined by a formula that is defined in the plan document. The benefit
is defined and predictable. The District is required to pay whatever is required to make that
benefit payment.
Defined contribution plan: The other type of retirement is a defined contribution plan. This is
what the management employees are on. Under this plan the District contributes a defined
amount of money each year to an account set up by each employee, and the employee
determines how it is invested. The amount of money in the account grows over time based on
the investment decisions of the employee. When the employee retires he or she has the amount
in the account to meet retirement needs. The benefit is completely undefined. It is determined
by how much money the investments earn over the years of employment. It can be a lot or a
little. The employee decides when to retire based on how much money is in the account.
Two types of defined contribution plan — 457 and 401(a): The 457 plan, which is the plan we
are currently using, and the 401(a) plan, the plan we are talking about implementing, are both
defined contribution plans. There are differences in how they work. For example, there are legal
limits on how much money can be deposited in each, but the amounts differ. More money can
be deposited each year in the 401(a). There are differences in how money is withdrawn at
retirement. The 401(a) is more flexible.
Employees can make contributions of their own: Even though the union employees are in
the defined benefit plan, which is fully paid for by the District, they can also participate in the 457
or 401(a) plans by making contributions on their own. Also, even though the District makes a
defined contribution to the 457 or 401(a) plans on behalf of the management employees, those
employees can make additional contributions on their own. These contributions must be through
a payroll deduction. The majority of union and management employees do, in fact, make
contributions as a way to improve their retirement benefits.
Employee contributions are a tax shelter: When union and management employees
contribute their money to the 457 or 401(a) plan it is a pre-tax contribution. So, in reality, it may
cost an employee only$80 to contribute $100 to his or her account. The benefit is taxable when
the money is withdrawn.
Lisa will be able to describe more of the details of the plans on Wednesday evening.