Adding retirement options
Phoenix began offering a supplemental retirement savings plan to employees last year to complement its long-standing 457 deferred compensation program. The 401(a) defined contribution plan was created after public safety employees — many of whom retire earlier than age 65 — raised concerns about saving enough money for retirement.
Two years ago, when the police and fire unions in Phoenix were bargaining for salary and benefits, they expressed interest in participating in a new state 401(a) plan that allowed state employees to invest some of their pre-tax salary for retirement. The unions were concerned that the federal limits on annual contributions to 457 plans — $14,000 at the time — would not accumulate enough funds for their members to retire. “Their members were talking about post-retirement and their concerns about people who were going to be fairly young and might not be able to count on their retirement program increasing as fast as inflation,” says Lera Riley, Phoenix’s personnel director.
The personnel department, however, was skeptical about sending money to another organization’s plan, so it asked its benefits consultant, New York-based Mercer Investment Consulting, to analyze the state’s program. “We concluded that it was not as comprehensive as the IRS regulations would allow us to have, and it did not meet all the needs of what the employee groups were trying to accomplish,” Riley says.
The city decided to create its own 401(a) plan with its 457 plan provider, Columbus, Ohio-based Nationwide Retirement Solutions. Under Phoenix’s 401(a), employees have three ways to participate. Each year, employees can choose whether the deferred compensation paid by the city as a percentage of their wages is deposited into the 457 or the 401(a). Also, they can choose to deposit an additional percentage of their annual salary to the 401(a) to supplement the amount already going into their 457. That component, however, is irrevocable under IRS rules, so once employees determine that percentage, they cannot change it. If employees participate, the federal contribution limit for 401(a) plans is $44,000 for 2006.
Finally, the 401(a) plan is available to use at retirement instead of accepting a lump sum taxed payout for unused sick time, vacation and comp time. That deposit is mandatory for general employees and optional for public safety employees, some of whom might want to put the money into a new business venture as they are more likely to retire younger than age 65.
The city launched an education campaign in fall 2004 targeted at employees who were retiring by Dec. 31, 2004. Then, in January 2005, it began rolling out the plan to all employees, beginning with public safety employees. The campaign included letters mailed to 14,000 employees’ homes, more than 60 workshops and several hundred one-on-one meetings between employees and investment representatives. The city and employee unions also published plan information in their newsletters. “With three components to a new plan that is very different from the old 457 deferred compensation program, we had to spend a lot of time with our employee groups making choices about what they wanted for their employees and then also trying to educate everybody about what it all translated into,” Riley says.
So far, more than 1,100 employees have shifted over to the 401(a) plan and can continue making voluntary contributions to their 457 accounts. “For many dual-income families, the city employee becomes the vehicle for the family to save for both working parents,” Riley says. “Someone may decide to put a lot of income voluntarily into the program. By freeing up that capacity in the 457, then you can have up to $15,000 in additional savings for retirement.”
Phoenix continues to publicize the new 401(a) plan and its other employee benefits. “We have a goal to make sure that our employees are participating as much as they can in some kind of program. Because some of our employees have a relatively small contribution that’s part of their fringe benefit package, we try to make sure that they recognize they may want to put some additional money of their own into the program,” Riley says. “All of us want to live for a very long time comfortably in retirement, so it gave us one more chance to talk to our employees about what they need to do for themselves.”
