Nongovernmental 457(b) and employer's creditors (legal)

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Nongovernmental 457(b) and employer's creditors (legal)

Postby UALflyer » Fri May 03, 2013 11:46 am

I've ran a number of searches on this topic and, while I came across plenty of prior 457(b) threads, none of them addressed the question of the steps, if any, that can be taken to shield assets held in nongovernmental 457(b) plans from the employer's general creditors. As we are all aware, the assets held in nongovernmental 457(b) plans are subject to the employer’s general creditors, and the employer is listed as the owner of each account with the employee listed as the annuitant. Having said that, does it matter what the money is invested in? I have seen some articles suggesting that the reason that many nongovernmental employers offering 457(b) plans use annuitized products is to shield the underlying assets from the employer's general creditors, as annuities enjoy some creditor protections under the bankruptcy code. Have any of you investigated these issues and determined the accuracy of these statements?

If the above statements are not, in fact, accurate, what have those of you with access to 457(b) plans decided to do? It's next to impossible to properly assess and quantify the insolvency risk of many very large employers offering 457(b) plans (or to project these risks out into the future) and it's a boatload of money in tax savings that we'd give up if we do not fully utilize 457(b)... except that the tax savings would pale in comparison to the losses that we'd sustain if the employer becomes insolvent in the future and its general creditors use 457(b) balances to satisfy the employer's debts.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Mon May 06, 2013 8:18 am

Any thoughts?
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Re: Nongovernmental 457(b) and employer's creditors

Postby dm200 » Mon May 06, 2013 8:24 am

UALflyer wrote:Any thoughts?


No experience or knowledge of 457(b) plans, but I do know that deferred compensation plans carry very significant risks to employees because those assets are part of the general assets of the employer (as best I understand, at least). You are correct, I believe, as well in your assessment that it is very difficult (probably impossible) for an employee of a company to accurately assess the financial risks of that company. Having "at risk assets" with the same company as your employer is the opposite of diversification, since the same factors that may cause you to lose your job also make any assts controlled by that company at risk as well.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Mon May 06, 2013 9:56 am

dm200 wrote:Having "at risk assets" with the same company as your employer is the opposite of diversification, since the same factors that may cause you to lose your job also make any assts controlled by that company at risk as well.
Right, hence my question as to whether holding 457(b) assets in annuitized products, which in my experience is very common, shields the underlying assets from the employer's general creditors the same way that holding assets in annuities with spendthrift provisions can protect your individual assets from your individual creditors. I've read a couple of articles suggesting that this is the case but haven't been able to independently verify these statements.

If this isn't accurate, what do people with access to nongovernmental 457(b) plans do?
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Wed May 08, 2013 8:46 am

Any other comments?
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Re: Nongovernmental 457(b) and employer's creditors

Postby letsgobobby » Thu May 09, 2013 12:47 am

I don't use it is what I do. Not worth the risk to me.
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Re: Nongovernmental 457(b) and employer's creditors

Postby xram » Thu May 09, 2013 7:49 am

I don't use mine. Never. No way. No thank you.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 9:05 am

For people who don't use their respective 457(b)'s, do you max out all your other retirement options and, if it wasn't for this employer insolvency concern associated with 457(b)'s, would you invest in them as well? What I am getting at is that if you don't have the money to fully max out all your retirement options, including 457(b), then you are obviously in a very different situation than those people who would otherwise fully max out all these options. If you don't have the money to take advantage of all these options, then the employer insolvency concern has very little to do with your decision.
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Re: Nongovernmental 457(b) and employer's creditors

Postby xram » Thu May 09, 2013 9:30 am

UALflyer wrote:For people who don't use their respective 457(b)'s, do you max out all your other retirement options and, if it wasn't for this employer insolvency concern associated with 457(b)'s, would you invest in them as well? What I am getting at is that if you don't have the money to fully max out all your retirement options, including 457(b), then you are obviously in a very different situation than those people who would otherwise fully max out all these options. If you don't have the money to take advantage of all these options, then the employer insolvency concern has very little to do with your decision.


I am able to max out 401k, backdoor roth IRA for me and wife. I buy all my IBONDS and EE BONds most likely as well. But I just cant accept 457b being subject to creditors. I would rather have it in taxable account than have to worry about it. Especially since my employment depends upon the same factor.

Maybe there is a study or something showing the risk of losing your money from the 457 but, for me, I cant imagine ANY way I would sleep OK at night. But that is just me I guess. I work too hard for my pay!

Also, just fYI....I am lucky to have plenty of money to invest in the 457b but no way would I every be comfortable taking that option.

I am lucky to have between 15k and 17K a month to invest,

Hoping to gain access to ARKANSAS DIAMOND plan. Just FYI if you happen to be a doc in arkansas.
https://myplan.ingplans.com/einfo/plani ... gplans.com

good luck
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Re: Nongovernmental 457(b) and employer's creditors

Postby retiredjg » Thu May 09, 2013 10:14 am

I don't know the answer to your question. But you did ask for thoughts.

1) I don't see how adding an annuity wrapper inside a non-governmental 457(b) plan would change the fact that the money in the plan is subject to the employer's creditors. But that is completely speculation on my part. If you have seen articles saying that, perhaps the only solution is to go to the references for those articles or to the authors of those articles. Or to an attorney that specializes in such things. Maybe a bankruptcy attorney that does corporate cases?

2) I don't see the creditor thing as the only problem to a non-governmental 457(b). To me, another significant issue is the fact that it can never be rolled over into anything other than another non-governmental 457(b). That means that it cannot be an attractive plan to participate in unless the expense ratios are very low - low enough that you'd be willing to invest there forever. Or at least your forever. :happy This is different from a 401k or 403b that might have less than desirable choices - at least the money can be rolled to something with better options.....somewhere, sometime.

3) It seems that people who have access to non-governmental 457b plans also have access to other things like 401k, 403b, etc. Occasionally, people can contribute to 3 different work plans. I assume you are filling those as well? And your spouse is filling his/hers as well?

4) Are you making use of 529 plans? HSA plans (if available and appropriate)? If you are filling every tax-advantaged bucket you can find, the next step would be back door contributions to Roth IRA (assuming no other IRAs are in the way) for one or both of you.

5) If you are doing all that stuff and still have money to invest, your choice boils down to accelerated payments on things like the mortgage, taxable investing, or the the ugly 457(b). Of those 3, I think ugly 457(b) would probably be my 3rd choice, but that's a guess since we have not seen the big picture of your investment possibilities.
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Re: Nongovernmental 457(b) and employer's creditors

Postby letsgobobby » Thu May 09, 2013 10:54 am

not to mention I bonds, EE bonds, muni bonds. That risk to creditors' is one of those risks you don't have to take. Good rule of thumb: take no risk you don't have to take. Especially uncompensated risk.
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Re: Nongovernmental 457(b) and employer's creditors

Postby MoneyOCD » Thu May 09, 2013 10:56 am

Do not have 457( b) but as HCE have access to 409(a) which probably even worse :annoyed
Use for very limited contributions but may increase contribution % as will get closer to the date.

Plan is very restrictive on distributions and also have the same risks as non-gov 457.
Main account inside the plan: if quit before age 55 - will get 5-year installment payout, if out at 55 or later- 10 year installment after 5 years of separation.
Can also set account for in-service distribution inside the plan.
Will create one at age 49 and get all contributions there for 5 year installment starting at 54 (right before 55) and quit at 55.
So in-service account will pay for first 5 years and then 10-year installment from main account will kick in to take me to age 70. Plan to have no more than 30k/year distributions from that plan, and load it in the last 3 years to mitigate risks. By that time plan to have mortgage to be paid off and kid out of college - that should free up cash flow to load that plan and save bunch on taxes.
Not sure how 457 works but for 409a I need to set accounts at least 5 years before distribution ,keep them active and then can increase contribution % later. If we go this route will depend on how company will do financially at that time. Right now just keeping accounts active for possible future use.
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Re: Nongovernmental 457(b) and employer's creditors

Postby MN Finance » Thu May 09, 2013 11:13 am

I don't have knowledge of the products impacting your protection; I imagine there are only a very few who do. By definition in order for the deferred compensation plan to achieve the desired outcome (tax deferral) there has to be a substantial risk of forfeiture - ie, the money has to be at risk. If not, the money in the plan would fail the IRS requirements and not achieve the desired outcome. That said, even if the investments matter (my intuition says no, but your research indicates there are nuances), the additional costs of those products (whatever they are) are likely to outweigh the benefits. There's a lot of study on standard 401ks that indicate that above a certain costs, despite the tax benefits, investors are better avoiding them and investing in a taxable account. I presume that would end up being the final outcome for you anyway.
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Re: Nongovernmental 457(b) and employer's creditors

Postby retiredjg » Thu May 09, 2013 11:35 am

MN Finance wrote:By definition in order for the deferred compensation plan to achieve the desired outcome (tax deferral) there has to be a substantial risk of forfeiture - ie, the money has to be at risk.

But the money in a tax deferred plan does not have to be at risk of being distributed to creditors if the employer goes belly up. Other tax-deferred plans do not have that risk.

In other tax-deferred plans like 401k, 403b, and governmental 457(b) plans, the money belongs to the employee no matter what happens to the employer. For a non-governmental 457(b) plan, if the employer goes bankrupt, the money suddenly does not belong to the employee any more - it could go to the employer's creditors.

A very strange set up in my opinion.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 11:38 am

retiredjg wrote:2) I don't see the creditor thing as the only problem to a non-governmental 457(b). To me, another significant issue is the fact that it can never be rolled over into anything other than another non-governmental 457(b). That means that it cannot be an attractive plan to participate in unless the expense ratios are very low - low enough that you'd be willing to invest there forever. Or at least your forever. :happy This is different from a 401k or 403b that might have less than desirable choices - at least the money can be rolled to something with better options.....somewhere, sometime.
Right, but it's not a disadvantage in our case, as the 457(b) has pretty attractive and decently priced investment options through TIAA. Regardless, even if it did not, if the options are to invest in a high cost 457(b) or a taxable account, because of the tax deduction it'd be very difficult to come up with a scenario where a taxable account would be better.

Hence, the reason that potential employer insolvency is really the only stumbling block here, but it's a big one.

3) It seems that people who have access to non-governmental 457b plans also have access to other things like 401k, 403b, etc. Occasionally, people can contribute to 3 different work plans. I assume you are filling those as well? And your spouse is filling his/hers as well?
Correct, we are maxing out my 401(k), my wife's 403(b) and backdoor Roth IRA's.

4) Are you making use of 529 plans?
No, and we will not be using 529's.

If you are filling every tax-advantaged bucket you can find, the next step would be back door contributions to Roth IRA (assuming no other IRAs are in the way) for one or both of you.
Backdoor Roth IRA's are already maxed out.

5) If you are doing all that stuff and still have money to invest, your choice boils down to accelerated payments on things like the mortgage, taxable investing, or the the ugly 457(b). Of those 3, I think ugly 457(b) would probably be my 3rd choice, but that's a guess since we have not seen the big picture of your investment possibilities.
That depends on whether having the option to annuitize your 457(b) assets provides creditor protection, as some of the articles that I've seen suggest. Hence, the reason for my question :)
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 11:41 am

letsgobobby wrote:not to mention I bonds, EE bonds, muni bonds. That risk to creditors' is one of those risks you don't have to take. Good rule of thumb: take no risk you don't have to take. Especially uncompensated risk.
I bonds, EE bonds and muni bonds are all far too conservative for our appetite and all expose you to the interest rate risk, which, in this environment, is the very definition of uncompensated risk (at least to us).
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Re: Nongovernmental 457(b) and employer's creditors

Postby letsgobobby » Thu May 09, 2013 11:52 am

If you hold bonds at all they may be more attractive than the alternative. Example: you are 80% stocks and 20% bonds. All your stocks are in 403b/401k, Roth IRA, HSA, taxable. All your bonds are I bonds and muni bonds. Unless you hold no bonds at all, they may have a role. If you hold no bonds at all, you are either uneducated or a risk-taker by definition in which case maybe investing in a non-gov 457b is your style. Also if that is true I'm not sure I want you flying my airplane. :wink:

We max out > $75k per year of tax-deferred investing, plus I bonds, plus 529, plus taxable, and still NO WAY am I tempted to touch my non-gov 457b. Before I got smart I put some money there, so a little under $50k is stranded there, but I ignore it for the purposes of my asset allocation. If it's there when I retire, it'll be a bonus.

Some of this depends on age - if you are 57, sure, go ahead - risk is small. I'm 39. Too many years to wait. And in health care, like the airline industry, profits and solvency are ephemeral.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 11:52 am

MN Finance wrote:the additional costs of those products (whatever they are) are likely to outweigh the benefits. There's a lot of study on standard 401ks that indicate that above a certain costs, despite the tax benefits, investors are better avoiding them and investing in a taxable account. I presume that would end up being the final outcome for you anyway.
The 457(b) is through TIAA, so while it's not the lowest cost plan out there, it's not at all a rip off. The annuity option (and, therefore, the costs thereof) would only become a factor if the employer goes belly up. In other words, if annuitizing the balance really would insulate us from employer insolvency risks, the annuitization costs would be a fair price to pay for ensuring that your money is protected (and you'd only incur that cost if the employer goes belly up).

By the way, speaking of insolvency risks, while employer insolvency risks are very difficult to assess and quantify, so are your individual insolvency risks associated with large lawsuits and the like. You assume the latter by investing in taxable accounts, muni bonds and the like (unless you go through irrevocable trusts, while greatly reduces your flexibility and adds substantial costs). In other words, you are essentially trading one insolvency risk for another.
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Re: Nongovernmental 457(b) and employer's creditors

Postby letsgobobby » Thu May 09, 2013 11:55 am

large umbrella policies and outstanding professional insurance are relatively low in cost. I am still eliminating/mitigating risk. A non-gov 457b is a risk I can't control.
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Re: Nongovernmental 457(b) and employer's creditors

Postby retiredjg » Thu May 09, 2013 12:05 pm

UALflyer wrote:...if the options are to invest in a high cost 457(b) or a taxable account, because of the tax deduction it'd be very difficult to come up with a scenario where a taxable account would be better.

You are already deferring taxes on $35,000. You are talking about deferring taxes on another $17,500 vs. paying the taxes and investing the money in tax-efficient stock index funds in a taxable account. Or does this apply to two of you - can you both use the non-governmental 457(b)?

What if you could get that money into Roth status? Would that be more attractive to you? Yes, there might be a way, but it takes too long to explain right now.


Hence, the reason that potential employer insolvency is really the only stumbling block here, but it's a big one.

I agree. It's kind of double or nothing. You have to put that money at complete and total and final risk of completely disappearing in order to get a benefit of paying less tax on the money at a later date than you would pay now. Is the benefit worth it? Is the benefit worth it only if the risk of losing is pretty low? Is this money you can actually afford to lose if the worst should occur? You don't need to answer these questions - I'm thinking out loud about questions you should ask yourself.


That depends on whether having the option to annuitize your 457(b) assets provides creditor protection, as some of the articles that I've seen suggest. Hence, the reason for my question :)

I agree. I've very interested in learning the real answer to your question. I'm betting the annuity wrapper doesn't mean squat (but this is based on no knowledge of anything pertinent).

You might edit your title to include something like "legal question" to attract the attention of some of the lawyers we have on the board.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 12:09 pm

retiredjg wrote:1) I don't see how adding an annuity wrapper inside a non-governmental 457(b) plan would change the fact that the money in the plan is subject to the employer's creditors. But that is completely speculation on my part.
Thanks for your thoughts. Conceptually, a suggestion that annuitizing the balance may insulate you from your employer's creditors does make sense for the same reason that setting up a non-assignable and non-transferrable spendthrift annuity on your own works. I just cannot figure out whether it really does work the same way in a 457(b) plan and, if so, what features an annuity must have in order to be effective (for instance, do you have to completely eliminate the cash surrender value or not?).
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 12:16 pm

letsgobobby wrote:large umbrella policies and outstanding professional insurance are relatively low in cost.
Umbrella policies and professional liability policies are not even close to insulating you from every or even most liability risks. They are enormously helpful but there are quite a few liability risks that they don't cover. Further, you can still end up with verdicts that exceed your policy limits.

A non-gov 457b is a risk I can't control.
Right, and that's the reason that it feels different, because we all feel like we can control our own liability exposure... I know that it's a completely false sense of security, as it's not unusual to feel like you've done nothing wrong and yet to still end up with tremendous liability exposure (luckily, we haven't had the misfortune of ever experiencing this ourselves), but it does feel different. I'm just not sure that this "feeling" is necessarily all that meaningful here.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 12:20 pm

retiredjg wrote:What if you could get that money into Roth status? Would that be more attractive to you? Yes, there might be a way, but it takes too long to explain right now.
We are in the highest tax bracket, so a Roth is only attractive to us if our only other option is a taxable account. Having said that, is there an option to get it into a Roth (other than backdoor Roth's, which we already max out) that's insulates it from the employer's creditors? I'd love to learn about it.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby letsgobobby » Thu May 09, 2013 12:21 pm

I think Jan means Roth 403b, for example.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby mah001 » Thu May 09, 2013 12:31 pm

Try not calling it a 457(b), when you do research. You seem to be talking about a 457(f).
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby UALflyer » Thu May 09, 2013 12:33 pm

mah001 wrote:Try not calling it a 457(b), when you do research. You seem to be talking about a 457(f).
I don't understand. It is unquestionably a 457(b).
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Re: Nongovernmental 457(b) and employer's creditors

Postby retiredjg » Thu May 09, 2013 12:43 pm

UALflyer wrote:Having said that, is there an option to get it into a Roth (other than backdoor Roth's, which we already max out) that's insulated from the employer's creditors? I'd love to learn about it.

Sometimes there is. My time is short, so this will be a short introduction.

Some 401k and 403b plans allow employees to make after-tax employee contributions that are over and above the "elective deferrals" you make each year (the $17.5k this year). This money goes in after-tax, but it IS NOT Roth 401k. Roth 401k would be part of your elective deferral. Most of the plans that allow this also allow employees to make in-service rollovers out to Roth IRA. If you make frequent enough rollovers out to Roth, there would be little in gains to pay additional tax on.

If either His 401k or Her 403b allow this type of contribution, you could get money that would otherwise go to your taxable account into Roth IRA instead, in addition to continuing your back door Roth contributions. Yes, it would be taxed at whatever you ordinary tax rate is so this is only a good option in contrast to putting the same money into a taxable account.

Your job - find out if either plan allows this. Look in your plan documents for the words "employee contributions" and "in-service rollover". Ask your HR people, but sometimes even they don't know this exists because few people use it. Call whoever offers His 401k and Her 403b plans and ask them. Occasionally, they will know when even your HR people don't know.

There are limits. This year's annual limit is $51k. That $51k is the total of your $17.5 in elective deferrals, employer match or profit sharing or whatever, and your after-tax employee contributions. It is possible your employer is already bringing you up to the $51k total and this would not help you. But it won't hurt to find out.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby retiredjg » Thu May 09, 2013 12:43 pm

letsgobobby wrote:I think Jan means Roth 403b, for example.

Not this time. :D
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 12:46 pm

retiredjg, thanks. I am familiar with making nondeductible contributions to retirement accounts and then making in-service withdrawals to get them into Roth IRA's. Unfortunately, our respective plans do not allow it.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby letsgobobby » Thu May 09, 2013 1:22 pm

sorry, misunderstood you Jan.
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Re: Nongovernmental 457(b) and employer's creditors

Postby letsgobobby » Thu May 09, 2013 1:26 pm

UALflyer wrote:
letsgobobby wrote:large umbrella policies and outstanding professional insurance are relatively low in cost.
Umbrella policies and professional liability policies are not even close to insulating you from every or even most liability risks. They are enormously helpful but there are quite a few liability risks that they don't cover. Further, you can still end up with verdicts that exceed your policy limits.

A non-gov 457b is a risk I can't control.
Right, and that's the reason that it feels different, because we all feel like we can control our own liability exposure... I know that it's a completely false sense of security, as it's not unusual to feel like you've done nothing wrong and yet to still end up with tremendous liability exposure (luckily, we haven't had the misfortune of ever experiencing this ourselves), but it does feel different. I'm just not sure that this "feeling" is necessarily all that meaningful here.

I believe you're truly overstating things when you say that "most liability risks" still exist given the above protections. If you envision such severe liability exposure that several million dollars of umbrella and multimillion dollars of professional liability insurance are not adequate to your situation, then 1. your situation is specific enough that taking advice from internet strangers is a bad idea and 2. contributing $17,500 annually to a 457b isn't going to make a dent in the situation anyway.

My parents have set up the kind of irrevocable trusts you describe, which is a further layer of asset protection, but of course it's not free.

I think a non-gov 457b is a solution looking for a problem. Or a problem waiting to become a worse problem. Or something like that. I don't see it as a solution to the problem you're articulating.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 1:53 pm

letsgobobby wrote:I believe you're truly overstating things when you say that "most liability risks" still exist given the above protections. If you envision such severe liability exposure that several million dollars of umbrella and multimillion dollars of professional liability insurance are not adequate to your situation, then 1. your situation is specific enough that taking advice from internet strangers is a bad idea and 2. contributing $17,500 annually to a 457b isn't going to make a dent in the situation anyway.
I don't think that it would be fair to characterize our liability exposure as severe and I didn't mean to suggest that it was. My point is that it does exist and isn't remote, as all liability policies have limits and do not cover everything. This, to me, means that you are essentially trading your employer insolvency risk for personal insolvency risk. For the reasons above, it does feel different, but I'm not at all sure that it really is all that different. Neither is particularly easy to assess or quantify, both are relatively unlikely to materialize but, if they do, the results are equally catastrophic.

I don't see it as a solution to the problem you're articulating.
Well, if annutization really does greatly reduce or even eliminate your employer insolvency risk, then it is about as good as it gets and is virtually the same as 401(k)/403(b) contributions. If it does not, then you are back to deciding between your employer insolvency risk and personal insolvency risk, all in the context of substantial tax advantages.
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Re: Nongovernmental 457(b) and employer's creditors

Postby MN Finance » Thu May 09, 2013 1:55 pm

UALflyer wrote:
MN Finance wrote:the additional costs of those products (whatever they are) are likely to outweigh the benefits. There's a lot of study on standard 401ks that indicate that above a certain costs, despite the tax benefits, investors are better avoiding them and investing in a taxable account. I presume that would end up being the final outcome for you anyway.
The 457(b) is through TIAA, so while it's not the lowest cost plan out there, it's not at all a rip off. The annuity option (and, therefore, the costs thereof) would only become a factor if the employer goes belly up.


Agreed. I was under the impression that some type of alternative investment strategy would be used to control the "type" of investment you presume to help protect you.

UALflyer wrote:In other words, if annuitizing the balance really would insulate us from employer insolvency risks, the annuitization costs would be a fair price to pay for ensuring that your money is protected (and you'd only incur that cost if the employer goes belly up).


I didn't gather from the original post that annuitizing was the method you considered may avoid the creditor issue. I can't say if that's accurate or not. On one hand the way the money is taken out may not matter for a creditor and they might attach themselves to the payments, OTOH, you indeed have the annuity features that normally protect the assets. My guess is the latter. In either case, annuitization only becomes an option post retirement, so there's no protection while still working. And at retirement you can mark this account as the first to draw down (it probably can't be rolled to an IRA).

UALflyer wrote:By the way, speaking of insolvency risks, while employer insolvency risks are very difficult to assess and quantify, so are your individual insolvency risks associated with large lawsuits and the like. You assume the latter by investing in taxable accounts, muni bonds and the like (unless you go through irrevocable trusts, while greatly reduces your flexibility and adds substantial costs). In other words, you are essentially trading one insolvency risk for another.


I suppose this is true. As someone else mentioned your umbrella policy would likely alleviate much of your won risk whereas you can't accomplish this with an institution.

UALflyer wrote:
mah001 wrote:Try not calling it a 457(b), when you do research. You seem to be talking about a 457(f).
I don't understand. It is unquestionably a 457(b).


It probably is a 457(b) because you work for a not for profit but in the rest of the world what your describing is more akin to a 457(f) so searching that might still help.

All in all, since costs are not a barrier (it is a barrier at lower costs than you might think), you have to weight the tax difference to employer solvency risks. I don't think you'll find any way to protect the assets. And if you save "a lot" into retirement accounts, you might have RMDs that eventually come out at your current bracket anyway, so tax savings might be pretty small.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 2:18 pm

MN Finance wrote:In either case, annuitization only becomes an option post retirement, so there's no protection while still working. And at retirement you can mark this account as the first to draw down (it probably can't be rolled to an IRA).
That's a very good point. Technically, that way that it works with TIAA is that all the funds are already held in annuity contracts, so I was thinking that the same protections (if they really are protections) would apply during our working years, but probably not, as your cash surrender value there is 100% of the balance (unless you actually annuitize, that is).

It probably is a 457(b) because you work for a not for profit but in the rest of the world what your describing is more akin to a 457(f) so searching that might still help.
I'll give it a shot.

All in all, since costs are not a barrier (it is a barrier at lower costs than you might think), you have to weight the tax difference to employer solvency risks.
Right, it's a very large and very "profitable" hospital (I put "profitable" in quotation marks, since it's technically a nonprofit, as they all are), so insolvency risks appear to be quite insignificant. Then again, I am sure that's exactly what all the Enron employees thought as well.

And if you save "a lot" into retirement accounts, you might have RMDs that eventually come out at your current bracket anyway, so tax savings might be pretty small.
True, and that'll be a nice problem to have. Frankly, I don't think it'll happen, since if the retirement savings start to approach that level, we'll most likely end up retiring early.
Last edited by UALflyer on Fri May 10, 2013 8:28 am, edited 1 time in total.
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Re: Nongovernmental 457(b) and employer's creditors

Postby letsgobobby » Thu May 09, 2013 2:22 pm

UALflyer wrote:
MN Finance wrote:In either case, annuitization only becomes an option post retirement, so there's no protection while still working. And at retirement you can mark this account as the first to draw down (it probably can't be rolled to an IRA).
That's a very good point. Technically, that way that it works with TIAA is that all the funds are already held in annuity contracts, so I was thinking that the same protections (if they really are protections) would apply during our working years, but probably not, as your the cash surrender value there is 100% of the balance (unless you actually annuitize, that is).

It probably is a 457(b) because you work for a not for profit but in the rest of the world what your describing is more akin to a 457(f) so searching that might still help.
I'll give it a shot.

All in all, since costs are not a barrier (it is a barrier at lower costs than you might think), you have to weight the tax difference to employer solvency risks.
Right, it's a very large and very "profitable" hospital (I put "profitable" in quotation marks, since it's technically a nonprofit, as they all are), so insolvency risks appear to be quite insignificant. Then again, I am sure that's exactly what all the Enron employees thoughts as well.

And if you save "a lot" into retirement accounts, you might have RMDs that eventually come out at your current bracket anyway, so tax savings might be pretty small.
True, and that'll be a nice problem to have. Frankly, I don't think it'll happen, since if the retirement savings start to approach that level, we'll most likely end up retiring early.

I can't imagine you are in health care - working for a hospital - and even contemplating a non-gov 457b. Without getting into banned political discussions or speculative policy discussions, it is a fair statement that the future of health care is going to be radically different financially than the last generation. My hospital - which previously had done very well - is now required to cut $27M from its annual budget this year. Our sister hospital has to cut $75M. These are EBITDA numbers - cold, hard cash - not accounting gimmicks. I read somehwere that approximately half of all hospitals operate on the brink of insolvency.

Sometimes people lose sight of the forest for the trees. Low turnover index investing is extremely low cost and extremely tax efficient. While umbrella doesn't protect from everything it protects from a lot of things - $5M protection costs $500.
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Re: Nongovernmental 457(b) and employer's creditors

Postby UALflyer » Thu May 09, 2013 2:28 pm

These are all fair points, letsgobobby (except that our umbrella is more expensive than that, but the difference is not material and doesn't affect the outcome of this discussion).
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby letsgobobby » Thu May 09, 2013 5:03 pm

This went unchallenged above, but you might reconsider your 529 options. They have protection from bankruptcy under federal law, and creditor protection varies state by state. They are excluded from your estate for estate tax purposes. They are increasingly low cost. And even with penalties and future marginal tax rates, many years of tax-deferred growth may put you ahead than where you would have been with a taxable account.
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Re: Nongovernmental 457(b) and employer's creditors

Postby retiredjg » Thu May 09, 2013 5:34 pm

UALflyer wrote:retiredjg, thanks. I am familiar with making nondeductible contributions to retirement accounts and then making in-service withdrawals to get them into Roth IRA's. Unfortunately, our respective plans do not allow it.

Oh well. Interestingly, you are the first person we've mentioned it to who didn't say "I can do WHAT?"
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby retiredjg » Thu May 09, 2013 5:35 pm

letsgobobby wrote:sorry, misunderstood you Jan.

Not a problem. :D
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby retiredjg » Thu May 09, 2013 5:43 pm

I think it is going to take a legal expert to sort this one out. I sure hope one runs across this topic tonight after work. :wink:
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby retiredjg » Thu May 09, 2013 6:09 pm

Doing some research, I found the following that is not the answer to your question, but might apply to your situation anyway if you live in the "right" state. See the last sentence.

http://board.403bwise.com/index.php?showtopic=4084
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby UALflyer » Fri May 10, 2013 8:21 am

letsgobobby wrote:This went unchallenged above, but you might reconsider your 529 options. They have protection from bankruptcy under federal law, and creditor protection varies state by state. They are excluded from your estate for estate tax purposes. They are increasingly low cost.
Our state's 529 does not have very good investment options and, in general, 529 plans offer very limited tax advantages but expose you to higher tuition risks. Now, given the fact that we are in the highest tax bracket, the latter is not a big concern, as we're unlikely to qualify for any breaks anyway, but you just never know.

And even with penalties and future marginal tax rates, many years of tax-deferred growth may put you ahead than where you would have been with a taxable account.
If you have to pay a penalty, you'll most likely end up being worse off than you would've been with a taxable account (or a nondeductible traditional account), not to mention the loss of flexibility.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby xram » Fri May 10, 2013 11:11 am

UALflyer wrote:Our state's 529 does not have very good investment options and, in general, 529 plans offer very limited tax advantages but expose you to higher tuition risks. Now, given the fact that we are in the highest tax bracket, the latter is not a big concern, as we're unlikely to qualify for any breaks anyway, but you just never know.



Just FYI: You are free to use ANY state's plan. Not just your own. I'm sure you know that. Just FYI.
Good Luck.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby UALflyer » Fri May 10, 2013 11:16 am

xram wrote:
UALflyer wrote:Our state's 529 does not have very good investment options and, in general, 529 plans offer very limited tax advantages but expose you to higher tuition risks. Now, given the fact that we are in the highest tax bracket, the latter is not a big concern, as we're unlikely to qualify for any breaks anyway, but you just never know.



Just FYI: You are free to use ANY state's plan. Not just your own. I'm sure you know that. Just FYI.
Good Luck.
I do know that. You just don't get the state income deduction if you use another state's 529.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby letsgobobby » Fri May 10, 2013 12:10 pm

UALflyer wrote:I do know that. You just don't get the state income deduction if you use another state's 529.


UALflyer wrote:
letsgobobby wrote:This went unchallenged above, but you might reconsider your 529 options. They have protection from bankruptcy under federal law, and creditor protection varies state by state. They are excluded from your estate for estate tax purposes. They are increasingly low cost.
Our state's 529 does not have very good investment options and, in general, 529 plans offer very limited tax advantages but expose you to higher tuition risks. Now, given the fact that we are in the highest tax bracket, the latter is not a big concern, as we're unlikely to qualify for any breaks anyway, but you just never know.

And even with penalties and future marginal tax rates, many years of tax-deferred growth may put you ahead than where you would have been with a taxable account.
If you have to pay a penalty, you'll most likely end up being worse off than you would've been with a taxable account (or a nondeductible traditional account), not to mention the loss of flexibility.


so as xram pointed out, regarding your first point, the solution is to fund your state's 529 only to the maximum state income tax deduction/credit, then to use another state's 529 beyond that. This maximizes your benefit while minimizing your costs. The alternative - one I highly recommend - is to move to a state with no income tax. :P

regarding your second point, it depends on your inputs for variables years invested, rates of return, and marginal tax brackets. Run an Excel spreadsheet to convince yourself. If you are in the top tax bracket plus state, your dividend/capital gains tax rate may be north of 25%. That is an annualized drag on your performance which will eventually be sufficient that a 529 investment - even with taxes and penalties - will be superior.

529s do have higher expenses than identical taxable investments, but the delta has been decreasing steadily. Administrative charges are dropping; furthermore, many 529s offer institutional level mutual funds with much lower ERs than we could get as individual investors.

Let's assume you and I are not going to get financial aid for our children, so that is a non-issue. [I did play around with the Princeton financial aid calculator, since they are apparently one of the most generous institutions in the country for need-based aid. I plugged in my current assets and income and got zero aid. Then I plugged in current assets but zero income, as if I decided to quit right now. I was suprised to see $20k in annual grants. That is with net worth > well into seven figures. So you may be surprised to learn you qualify for some aid, but if you stay in the top marginal tax bracket you definitely won't.]

529s have more flexibility than you might think. You can use them for any of your children, nieces, nephews, grandchildren. You can use them for undergrad or grad school, half-time or full-time, traditional college or returning to school much later. You can also use the funds for yourself, if you are at least a half-time student. Given all these options, I have a hard time seeing how we couldn't use up the money. And the money that we don't use will have grown tax-deferred for all those decades (see above paragraph)... and then I would only withdraw the money for non-QHEEs once I had retired into a lower marginal tax bracket than when I put the money in.

I ran all the numbers for my own situation and you should, too, but I learned that a stock-only 529 investment for > 20 years or so is likely to outperform a taxable all-stock investment, even with penalties and taxes. This will be even more true if I am retired when I start withdrawing the money.

Don't forget the estate and creditor benefits of a 529, which was your original reason for asking about non-gov 457(b) plans in the first place.

Hope that helps.
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Re: Nongovernmental 457(b) and employer's creditors (legal)

Postby DrDubious » Tue May 14, 2013 8:55 am

UALflyer wrote: I have seen some articles suggesting that the reason that many nongovernmental employers offering 457(b) plans use annuitized products is to shield the underlying assets from the employer's general creditors, as annuities enjoy some creditor protections under the bankruptcy code.


Any chance you could direct us to one or more of these articles? I would be curious to see them. Thanks.
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