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Not bad for government work

A traditional government job doesn't have to come with a traditional government pension.

A traditional government job doesn't have to come with a traditional government pension.

By Jinny St. Goar
January 2001
Institutional Investor Magazine

A traditional government job doesn't have to come with a traditional government pension. Recently, more and more state and local governments have set up 401(a)s, a defined contribution plan that offers a number of advantages usually found only in corporate programs. With unemployment rates so low and certain jobs, particularly high-tech ones, so hard to fill, the public sector needs all the help it can muster in attracting and retaining employees.

Few government entities can use the 401(k) structure, and their conventional defined contribution plan, a 457 pro-gram, does not permit an employer match. The 401(a) plan, which dates back to the enactment in 1974 of ERISA, enables state and local governments to provide the match. ERISA also allows a plan account to be rolled over into a corporate or another government retirement plan.

On January 1, Arlington County Employees' Retirement System in Virginia, which serves 7,500 participants, was scheduled to introduce its new 401(a). Arlington County currently has about $1 billion in defined-benefit-plan assets but only about $100 million in defined-contribution-plan assets.

Arlington's managers hope the 401(a) will prove to be an effective recruiting tool. "We are looking to attract and retain people to run our information technology systems," explains Marcy Foster, the chief of employee services for the system, located in the midst of the growing high-tech hub just outside Washington. "You can't get 'em, and if you do, they're hard to hold on to."

The county's 401(a) plan will allow employees to make aftertax contributions whose earnings are tax-deferred while continuing to make pretax contributions to their 457 plans. The initial employer contribution is modest: $15 per employee for each two-week pay period. Aetna Financial Services will administer the plan.

Virginia Retirement System, with $452 million in its existing 457 plan, will add its 401(a) on February 1. Participation in the 457 plan has run at about 38 percent, compared with an average participation rate of 78 percent for corporate 401(k) plans, according to a 1999 Hewitt Associates survey of 491 corporate plans with aggre-gate assets of $300 billion. Says Gregory Seller, who oversees government plans for Great-West Life & Annuity Insurance Co., a recent entrant into the 401(a) market, "Match plans are a great way to increase participation in a voluntary defined contribution plan."

That's why Maryland State Retirement Systems, with $1.7 billion in defined contribution assets (and $30 billion in defined benefit assets), added a 401(a) plan in July 1999. Before that, participation in Maryland's defined contribution plan had been running just above 50 percent, reports Michael Halpin, deputy executive director of the plan. "Now, with the match, we are at about 77 percent," he says. Nationwide Financial Services administers Maryland State's 457 and 401(a) plans.

Increasingly, government plans that convert from defined benefit to defined contribution structures opt for 401(a)s. "Government employers are looking for ways to offer incentives to their employees," says Scott Baker, the national director for 401(a) strategic development at Aetna Financial Services, which currently has more than $1 billion in 401(a) assets under management. As an example, Baker cites the Florida State Board of Administration, which is converting the Florida Retirement System's defined benefit plan, with $107 billion in assets, to a 401(a). Says Baker, "Portability is the mantra for these new 401(a) plans."