Upgrading Public Sector 457/401(a) Plans: Enhance, Engage & Reintroduce-Without Additional Costs

Many municipalities, public sector special districts, and agencies I work with are often surprised to learn that the supplemental deferred compensation plans, 457 & 401(a), can be upgraded and improved at no added cost. After health insurance, retirement programs are typically the most valued. A recent McKinsey & Co. study identified compensation as the reason for retention. Since you likely don't have an open checkbook, increasing the value of a benefit exclusive to the public sector might be worth considering in the new fiscal year. Supplemental plans have gained importance and function. The catalyst for exploring an improved 457 plan varies, but it is frequently due to one of three scenarios:

Employees & Retirees are increasingly asking for help

Employees and retirees frequently seek assistance with their finances, often including their spouse or partner in these discussions. The complexity extends beyond retirement plans, encompassing current expenses, emergency savings, and investments while planning for future financial goals. Navigating investments, tax implications, and benefits options can be overwhelming, necessitating guidance to make informed decisions. Retirees, in particular, face the challenge of managing fixed incomes, retirement income products, healthcare costs, and potential market volatility. PwC found that 74% seek financial guidance. Help means different things to different groups. Offering group meetings, live webinars, in-person one-on-one, and virtual one-on-one covers all the bases.

Making advice available, cost-efficient, convenient, and conflict-free is what many are seeking. Once added to your program I encourage all senior leadership, not just human resources, to communicate and reinforce that help is available and in multiple formats. This can be part of any 457 401(a) plan upgrade - at no added cost.

Overabundance of Funds and the Paradox of Choice

A growing trend is removing clutter or duplication. Many that I work with are well aware existing fund menus are overwhelming. That prompts a necessary conversation. The fund menu also leads to poor investment allocations and excessive fees. Both reduce account balances.

Psychologists Sheena Iyengar and Mark Lepper researched how too many choices can lead to decision paralysis and dissatisfaction. Bottom line: choice is demotivating. In their study shoppers on one day could choose from 24 different types of jam, while on another day, the selection was limited to just 6 types.

The results were revealing. While the larger display attracted more attention and more shoppers stopped to sample the jams, the smaller selection resulted in significantly higher sales. Specifically, 30% of shoppers who sampled from the limited selection made a purchase, compared to only 3% of those who sampled from the extensive selection.

This phenomenon, known as the "paradox of choice," suggests that although people believe that more options will lead to greater satisfaction, too many choices can overwhelm and hinder decision-making. It can lead to anxiety and indecision. The largest deferral plan, the Thrift Savings Plan for federal employees has 5 core investment options and an index target date series. Boeing, the largest 401(k), offers 11 funds (6 active funds and 5 index funds) and an index target date series.

Many 457 401a fund menus today have 30 or sometimes 50 options. Some have multiple recordkeepers which can increase choice overload. There are many reasons an efficient fund menu (e.g. -10 options and Target Date (age) Fund series) can lead to better outcomes. 30 choices means that in theory, 240 decisions per year would be made if someone were to properly utilize the choices. Often too many choices will lead to confusion and lower participation. If you are skeptical and think it only applies to jam the same researchers studied 800,000 participants in Vanguard plans and saw similar outcomes- UPenn Wharton

"Fixing the fund menu with lower-cost, best-in-class funds will require negotiating the recordkeeper fee since they are currently combined. A professional with public sector plan expertise can ensure that fee reductions and improved benefits, such as fiduciary advice/financial wellness services are included & coordinated with the recordkeeper offerings"

Post Covid with a Pre-Covid plan followed by the "Great Retirement Wave"

There's an unusually high number of job openings at the state and local level, according to the Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics since 2022. Tight budgets and fierce talent competition mean optimizing every form of compensation. Lately, I have heard from Plan Administrators, HR Directors, General Managers, Finance Directors, and Payroll Managers that existing plans have been in place "as is" for some time. If they can upgrade a benefit at no cost- it's a no-brainer.

I also hear an interest in simply wanting confirmation that their plans are competitive and properly benchmarked. Retirees question whether they should remain in the plan. Retirees can emphasize, from their own experience, that retirement plans are a valuable benefit, akin to compensation

Other benefits "force" a look since they have a price tag, think health insurance. In most 457/401(a) plans fees and expenses are not transparant. Investments "subsidize" plan services and record-keeping fees, leading to less scrutiny and visibility. It is neither common nor considered best practice to rely upon a covered service provider to "self-grade" or benchmark fund performance at the risk of stating the obvious.

"Budgeting time for 457/401(a) evaluation has become an agenda item for many in Fiscal Year 2024/2025- driven by awareness of new & improved alternatives, plan participant/retiree inquiries, and comparisons to 401(k) plan & 403(b) nonprofit options."

Closing thoughts

From 2020 to 2023 (Covid), a supplemental deferral review for many was simply not an option. Today fortunately improving the 457/401(a) program doesn't require a budget and expenses are reduced. In some ways, it's like eliminating the deductible in a medical or dental plan without any health care cost increase or budget impact. If you have questions or would like additional information on what some of your peers in the public sector have achieved, send an email to: [email protected] -