Should your school district offer deferred compensation? |
On Board Online • May 24, 2010
By Edward Lilly
Executive Director, New York State Deferred Compensation Board
Retirement planners say retirees should have at least 80 percent of their pre-retirement salary to maintain their standard of living. But many teachers in New York State are retiring with benefits that fall far short of that 80 percent.
Of the 5,644 members of New York State Teachers’ Retirement System (TRS) who received initial benefits between July 1, 2008 and June 30, 2009, more than 34 percent retired with a benefit of less than $30,000. Only those retirees with more than 30 years of service retired with an average benefit of greater than $50,000.
Only retirees with more than 30 years of service can reasonably expect their combined pension and Social Security benefits to exceed 80 percent of their pre-retirement income (see chart).
Even that elite group could benefit from additional retirement savings. Consider a retiring teacher with 30 years of service and an $80,000 final average salary. That individual can expect a maximum pension of $48,000. Assuming the teacher retires at age 62 and begins to receive Social Security immediately, add approximately $17,000 for a combined benefit of $65,000. This equals 81 percent of final average salary but is at least $15,000 less than pre-retirement salary.
Remember that “final average salary” used to determine TRS benefits may be less than the teacher’s salary upon retirement if increments or raises occurred during the last three years of employment. If the employee elects a survivor’s benefit, the pension will be reduced and the retirement income gap even greater. And inflation will erode the value of TRS pension benefits. (Social Security benefits are adjusted for cost-of-living annually.)
So, without a supplemental retirement savings plan, most school district employees will experience a significant income loss upon retirement. This is why school boards should consider offering a Section 457(b) deferred compensation plan. Already more than 200 school districts in New York State sponsor deferred compensation plans.
Sponsorship of an eligible deferred compensation plan does not require an employer contribution or match but provides a tax advantaged opportunity for employees to build a retirement nest-egg to overcome the retirement income gap and better prepare for retirement security.
Employee contributions to a deferred compensation plan are deducted directly from their paychecks on a pre-tax basis and taxes on earnings are deferred until distribution. Income taxes are paid on contributions and investment earnings only when a payment is made to the employee, which is generally after a severance from employment.
A school district may sponsor an eligible deferred compensation plan in two ways:
- Adopt the model plan document prepared by the New York State Deferred Compensation Board. This requires the school district to select the plan administrator, investment options, and other plan providers in accordance with the rules and regulations of the board. These rules can be found at http://www.goer.state.ny.us/nysdcp/index.html.
- Become a participating employer in the New York State Deferred Compensation Plan. To do this, the school board merely adopts a resolution. Since the Deferred Compensation Board conducts the request for proposals procurement procedures on behalf of all participating employers, the school district is relieved of this requirement.
The New York State Deferred Compensation Board was created through Section 5 of the State Finance Law and, thus, is a public entity. The governor, president pro-tem of the Senate and the speaker of the Assembly each appoint one member to the board.
For additional information on how to sponsor a deferred compensation plan, the Rules of the New York State Deferred Compensation Board, and other benefits of sponsoring a deferred compensation plan, please call Executive Director Edward Lilly at (518) 473-6619 or write to him at the New York State Deferred Compensation Plan, Empire State Plaza Station, P.O. Box 2103, Albany, NY 12220-2103.