With A 401(a) Plan, You Can Help Schools Keep Their Teachers

Now to the 401(a) plans, and their unique design advantages.

Employer contributions to a 401(a) plan typically take one of two forms–an employer match (usually on amounts the employees defer to their voluntary 403(b) program); or an employer non-elective contribution (for example, based on a percentage of compensation). State law permits school districts to sponsor 401(a) plans, but some state statues limit the powers of the school district.

Establishing a 401(a) plan under the employer match approach assures that the district will have flexibility in its contribution amounts. (This may be a better choice than the second approach, since the employer match design enables the employer to control how it wants to contribute and to whom. Those options arent available in the second approach, which has everything predetermined.)

Another key advantage is that public (governmental) employers have no discrimination rules regarding employer contributions to the 401(a) plan, as established in the Taxpayer Relief Act of 1997. (By contrast, private non-profit organizations do not have a similar exemption from non-discrimination rules.)

This exemption allows a public school to design a 401(a) plan that would contribute a higher percentage to, say, math and science teachers, or perhaps teachers on high-turnover campuses. It also allows inclusion of many other features that are very difficult to offer in the private sector due to the burden of non-discrimination rules.

When designing a retirement plan for a public school district, you need to know that each district (and respective campus) has different goals. The plan must be designed to benefit specific groups of employees. To do this, contribution levels can be tied to such things as performance, attendance, contract renewal and other measurements; and the vesting of plan assets can be tied to an employees years of service with the district.

In addition, to help each district maximize the most benefit from the plan, you can tailor the design elements of eligibility, funding, matching, vesting, cost structure and other plan features.

Yet another important advantage is the reduced cost and increased flexibility of dollars spent on a retirement plan in comparison with dollars spent on salary increases.

For every dollar spent on salary, school districts must pay additional amounts on Social Security, Medicare, teacher retirement systems, and other payroll taxes. By contrast, the dollars spent on a retirement plan are not subject to payroll taxes and are much more flexible in their use.

Under the 401(a), plan benefits can be limited to specific employees (math or science teachers, for instance) and can be tied to performance, attendance, contract renewal and other measurements. In addition, you can design benefit-vesting schedules (often a five- or six-year cliff vesting) to help maximize employee retention.

Finally, the 401(a) is a plan that can, for all intents and purposes, pay for itself. Thats because, by reducing teacher turnover, school districts can save on the costs for recruiting and replacing teachers who would formerly have left the district.

Furthermore, by improving teacher attendance, districts can reduce the expense of paying for substitute teachers (up to $150 per day). And any non-vested plan benefits that remain–when a teacher does leave the district–can be used to offset future employer contributions and/or plan expenses.

You can find new opportunities for 401(a) sales at state and local government employers and other municipal organizations, as well. Many such entities face problems similar to those being experienced by school districts, and many are now turning to 401(a) matching plans to help retain their employees and encourage increased retirement savings.

In sum, if you want to broaden your worksite benefits scope to include public schools and governmental bodies, the 401(a) plan might be just the product to get you in the door.

is senior vice president-business development for PlanMember Securities Corporation, a registered broker/dealer and investment advisor in Carpenteria, Calif. He can be e-mailed at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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