Kentucky State Government employees (who receive a regular paycheck) may participate in one or both of the Supplemental Retirement Savings Plans available through the Kentucky Public Employees’ Deferred Compensation Authority (Authority) program (IRC Section 457 and 401 (k)). In addition a Roth 401(k) option, Deemed Traditional IRA’s and Deemed Roth IRA’s are available for after-tax investment diversification. Participation in this valuable benefit is optional for the employee. The Authority administers both Plans. The Authority, attached to the Personnel Cabinet for administrative purposes only, is part of Kentucky State Government.
Both the 457 and 401(k) deferred compensation plans let you defer "pre-tax" income from your regular compensation and set it aside for retirement. Money set aside for deferred compensation is automatically payroll deducted twice each month. State employees have the option of selecting a set dollar amount to be deducted per pay period, or specifying a percentage of salary to be deferred each pay period through the "Automatic Contribution Escalator" (ACE). There is a $30.00 per month deferral requirement. You pay no state or federal income tax on the money you defer, or the earnings of your account balance, until you begin receiving benefits payments after retirement (including early retirement) when you may be in a lower tax bracket. Under the certain retirement incomes, including distributions from both deferred compensation plans, are now 100% excluded from Kentucky state taxes, up to an annual dollar maximum (indexed) of $41,110 per person.
The plan is not meant for short-term savings, and monies deferred are generally not available except for financial hardship, termination of employment (voluntary and involuntary), retirement, or disability retirement from Kentucky State Government. Hardship is defined by IRS regulations and claims must be approved by the Authority in accordance with those definitions. Hardships do not include withdrawals for buying an automobile, consumer goods, or repayment of loans or credit card charges. A loan program is available to those participating in either the 457 or the 401(k) Plan, who want to borrow from their account. In addition, a state employee, with at least fifteen (15) years of state service, can "rollover" part or all of their 457 and/or 401(k) account to the Kentucky Retirement Systems to purchase up to five (5) years of "non-qualified" service credit, or any other service acceptable to the Kentucky Retirement System.
In addition to the 457 and 401(k) plan, The Authority offers a Roth 401(k) option and Deemed and Traditional IRA’s. These three (3) options provide after-tax investment opportunities, which offer an additional level of tax-diversification.
Investing for Retirement
You choose which fund or funds to invest in. The Authority currently offers over 30 investment options to participants in both plans, including managed lifecycle funds. The Spectrum of Investment Options (Spectrum) contains investment choices (primarily no-load mutual funds) that range from conservative (fixed contract, money market, government and corporate bond funds) to moderate (balanced, equity income, large cap growth funds) to the more aggressive (mid cap, small cap, and foreign funds). Included in the mix are a Total Bond Market index fund, an S&P 500 index fund, a Mid-Cap stock index fund and a Small-Cap stock index fund. To help ensure appropriate performance results are maintained the Board of Trustees has adopted "Selection and Evaluation Criteria Standards." These have been specifically designed for the ongoing analysis and determination of the funds to be offered in the Spectrum. Please note that mutual funds have no guarantee of return or principal. In addition, there is some uncertainty with every investment.
You have the flexibility to make exchanges of your fund balances between funds within the Spectrum on a daily basis. Deferral amounts, percentages, and fund investment options may be changed from one pay period to the next available pay period.
There is an on-going annualized record keeping and administrative fee, which is deducted periodically from your account and reflected on each quarterly transaction-based statement. The Authority has an on-going process to review the costs to administer the system with the objective to reduce participant fees whenever feasible. This process has successfully reduced fees in seven (7) of the past eleven (11) years. The total recurring annual savings to participants now exceeds $3 million.
Planning for Retirement
Long range planning and systematic saving for eventual retirement is one of the most important undertakings for employees during their state government career. With today’s trends of employees retiring at younger ages and living longer in retirement (you may live as long or longer in retirement as you worked!), employees can rarely afford to rely solely on traditional defined benefit pension plans and Social Security as their only sources of retirement income for their "golden years." Chart A (below) shows the advantages of investing through deferred compensation. Chart B (below) shows the advantages of deferring early.
Through "your" deferred compensation provided to you as an "optional" benefit by the Commonwealth, you may, depending upon your income, save up to 100% of your gross salary up to the annual maximum of $15,500 in 2007 in the IRC Section 457 Plan, and up to $15,500 in 2007 in the IRC Section 401(k) Plan. Depending upon your age, or other factors, you may be eligible to defer even more. Maximum deferrals are indexed annually in $500 increments after 2007. For the IRS options, an after-tax aggregate contribution of $4,000 earned income is allowed in 2007 ($5,000 in 2008 and indexed in $500 increments thereafter).
Staff of the Authority and its statewide field service team is always available during regular working hours to assist you in planning, preparing, and saving for your eventual retirement. Authority Payout Counselors are happy to work with you as you select the payout most appropriate for your individual needs. A comprehensive web site (www.kentuckydcp.com) and a voice response unit (800.793.4401) are available 24 hours per day, 7 days a week and provide account information as well as a method for making account changes.
For information on participating in your deferred compensation program, please contact Authority staff at 502.573.7925 or toll free at 800.542.2667.