Safety of Government 457(b) to Bankruptcy, Creditors?

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Kodachrome64
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Safety of Government 457(b) to Bankruptcy, Creditors?

Post by Kodachrome64 »

[Note: this is a thread from 2009 that was recently bumped. -- moderator oldcomputerguy]

Hello, I have both 403b and 457b available as a public school teacher (LAUSD, California). I like my 457b offerings better. Our school district is currently having a lot of financial problems. While our district 457b currently has only $5 million in total assets, if it contained significantly more, I could see our superintendent trying to get his paws on it.

However I read about how the 1994 Orange County California bankruptcy put the 457b of public officers - police, fire, etc. at risk to credotors and that it in fact lost 20% to creditors, and that these public officer unions advised employees to discontinue making contributions to it.

I know non governmental 457b definitely are subject to creditor claims. But it sounds like the 1994 Orange county b[Note: this is a thread from 2009 that was recently bumped. -- moderator oldcomputerguy]akruptcy affected governmental 457b's?

My question: Is it a concern enough that one would advice I using a 403b plan first, everything else being equal (no employee match for either, investment quality equal between 403b and 457b, etc)? My 403b plan offers Dodge and Cox and Vanguard mutual funds through a CalSTRS administered plan. But I happen to feel that the funds offered in my 457b are even more to my liking.

Out of safety, should I go with the 403b over the 457b though?
chaz
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Post by chaz »

Play it safe. LAUSD is cutting back on retiree benefits (health insurance).
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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BruceM
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Re: Safety of Government 457(b) to Bankruptcy, Creditors?

Post by BruceM »

Kodachrome64 wrote:Hello, I have both 403b and 457b available as a public school teacher (LAUSD, California). I like my 457b offerings better. Our school district is currently having a lot of financial problems. While our district 457b currently has only $5 million in total assets, if it contained significantly more, I could see our superintendent trying to get his paws on it.

However I read about how the 1994 Orange County California bankruptcy put the 457b of public officers - police, fire, etc. at risk to credotors and that it in fact lost 20% to creditors, and that these public officer unions advised employees to discontinue making contributions to it.

I know non governmental 457b definitely are subject to creditor claims. But it sounds like the 1994 Orange county bakruptcy affected governmental 457b's?

My question: Is it a concern enough that one would advice I using a 403b plan first, everything else being equal (no employee match for either, investment quality equal between 403b and 457b, etc)? My 403b plan offers Dodge and Cox and Vanguard mutual funds through a CalSTRS administered plan. But I happen to feel that the funds offered in my 457b are even more to my liking.

Out of safety, should I go with the 403b over the 457b though?
Government 457(b) plans, along with 403(b) (Govt or non-profit) and all qualified plans must be funded. This is IRS speak, meaning the contributions must be placed in a custodial account or trust exclusively for the future benefit of the employee or dependents. Once this is done, the fiscal health of the Govt employer shouldn't make any differrence.

The only time this could be a problem is if the employer (Govt in your case) makes a contribution to the plan (unusual but possible), but the transfer is never completed due to fiscal crisis of some sort.

As you point out, non-profit 457(b) or any 457(f) cannot be funded, and must remain an asset of the employer until the employee meets the plans requirements for a distribution and is in 'constructive receipt' of part of the plan assets.

What WOULD concern me are the defined benefit plans of some of the states and counties I have been reading about. Some are offering generous retirement benefits but are hopelessly underfunded. Because these are not Title IV plans, its simply up to the state legislatures to ensure future benefits, however that might be done.

And health benefits are generally not accrued benefits, so they can be cut or suspended.

BruceM
the intruder
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Re: Safety of Government 457(b) to Bankruptcy, Creditors?

Post by the intruder »

Kodachrome64 wrote:Hello, I have both 403b and 457b available as a public school teacher (LAUSD, California). I like my 457b offerings better. Our school district is currently having a lot of financial problems. While our district 457b currently has only $5 million in total assets, if it contained significantly more, I could see our superintendent trying to get his paws on it.

However I read about how the 1994 Orange County California bankruptcy put the 457b of public officers - police, fire, etc. at risk to credotors and that it in fact lost 20% to creditors, and that these public officer unions advised employees to discontinue making contributions to it.

I know non governmental 457b definitely are subject to creditor claims. But it sounds like the 1994 Orange county bakruptcy affected governmental 457b's?

My question: Is it a concern enough that one would advice I using a 403b plan first, everything else being equal (no employee match for either, investment quality equal between 403b and 457b, etc)? My 403b plan offers Dodge and Cox and Vanguard mutual funds through a CalSTRS administered plan. But I happen to feel that the funds offered in my 457b are even more to my liking.

Out of safety, should I go with the 403b over the 457b though?
After the OC bankruptcy Congress changed the rules for Gov 457b plans to make the plan's assets exempt from the government entity's creditors by adding IRC 457(g) to require that the plan's assets must be held in trust for the exclusive benefit of the participants. The assets of a Non profit 457b plan are still subject to the claims of the sponsoring employer's creditors.
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Adrian Nenu
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Post by Adrian Nenu »

My 457 and most others hire vendors/custodians which administer the money and keep it separate from the employer's finances. I checked with HR and the county lawyer a few years ago and both said there has never been a case in which 457 investors lost money due to their employer's financial condition/creditor claims, etc.

Adrian
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the intruder
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Post by the intruder »

Adrian Nenu wrote:My 457 and most others hire vendors/custodians which administer the money and keep it separate from the employer's finances. I checked with HR and the county lawyer a few years ago and both said there has never been a case in which 457 investors lost money due to their employer's financial condition/creditor claims, etc.

Adrian
anenu@tampabay.rr.com
Obviously the lawyer never heard of the OC bankruptcy where the employees had to take a haircut after the bankruptcy because the 457b assets were considered property of the county. Government 457b money must now be held in a spendthrift trust which provides that the assets are not subject to the claims of the employer's creditors.
GG
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Post by GG »

The assets of a 457b are not subject to the creditors of the institution.
GG
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Post by GG »

so which is it?:
Government 457b money must now be held in a spendthrift trust which provides that the assets are not subject to the claims of the employer's creditors.
or
The assets of a Non profit 457b plan are still subject to the claims of the sponsoring employer's creditors.
You're trying to sound too smart
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RJSachs
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Post by RJSachs »

GG wrote:so which is it?
Government != Non-profit
the intruder
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Post by the intruder »

GG wrote:so which is it?:
Government 457b money must now be held in a spendthrift trust which provides that the assets are not subject to the claims of the employer's creditors.
or
The assets of a Non profit 457b plan are still subject to the claims of the sponsoring employer's creditors.
You're trying to sound too smart
Both answers are correct as there are difference in administration of the two types of 457b plans. As I indicated previously IRC 457(g) requires that government 457b plans must be held in a trust that is not subject the claims of the employer's creditors. However, employees who have funds in a non profit 457b plan will be taxed on the contributions if the funds are held in a trust that is not subject to the claims of the nonprofit's creditors. See IRS reg. 1.457-8(b).

There are other differences between the plans such as no rollovers or loans are allowed from NP 457b plans but are allowed from govt 457b plans.
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Peter Foley
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Post by Peter Foley »

GG
The distinction that the intruder is making is the difference between a government 457b plan and a non profit 457b plan [usually a 501c3)]. Many charities are 501c3's.
the intruder
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Post by the intruder »

RJSachs wrote:
GG wrote:so which is it?
Government != Non-profit
No, they are different entities under the tax law. State governments and their instrumentalities such as cities and counties are automatically exempt from federal income tax. Non profits must be approved by the IRS before they will be exempt from income tax and can lose their tax exempt status if they violate any of the rules for non profits in IRC 501-514. In the world of pension plans they are treated differently. Government pension plans are exempt from federal pension law (ERISA) and most of the IRC provisions relating to qualified plans. Non profit retirement plans are subject to both laws.
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BruceM
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Post by BruceM »

GG wrote:so which is it?:
Government 457b money must now be held in a spendthrift trust which provides that the assets are not subject to the claims of the employer's creditors.
or
The assets of a Non profit 457b plan are still subject to the claims of the sponsoring employer's creditors.
You're trying to sound too smart
This can get a bit confusing.

Here's an overview of Section 457

A 457(b) plan may be either for Government employees or for employees of a non-profit organization (but not churches) and are sometimes called 'eligible' 457 plans. They are similar in that the contribution limit is the same as qualified plans (16,500 max salary deferral), withdrawals prior to age 59.5 are not subject to the 10% early withdrawal penalty and they are subject to minimum required distributions at age 70.5. But they differ in several other ways. As mentioned, the Govt 457(b) must be funded whereas NP 457(b) plans may not be, the Govt 457(b) is transferrable to an IRA or another retirement plan, but a NP 457(b) generally is not. Govt 457(b) plans must generally be available to all employees while a NP 457(b) must be available only to select highly compensated employees

And then there are 457(f) plans, which are true deferred comp for both Govts and NPs. Like corporate deferred comp, they have no annual contribution limits, contributions are unfunded and setup and administration rules fall under the requirements of section 409(A). You don't see these nearly as much as 457(b)s, but are common with positions like University Presidents, college head football coaches and presidents/Officers of the big NPs like Goodwill Industries. I've always wondered if the US President has a 457(f).

BruceM
BBurki
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Re: Safety of Government 457(b) to Bankruptcy, Creditors?

Post by BBurki »

Just checking if the responses to this post are still correct 13 years later. So is it still the case that a government 457(b) is required to be held in trust and thus insulated from that government's creditors?
VCC
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Re: Safety of Government 457(b) to Bankruptcy, Creditors?

Post by VCC »

-Yes.
Sprucebark
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Re: Safety of Government 457(b) to Bankruptcy, Creditors?

Post by Sprucebark »

This thread is like a boglehead graveyard. Most of the posters have long since vanished.

I was getting excited reading the thread until I saw it was from 2009…

Seems like things turned out ok after all for the LA school district. They ended up not declaring bankruptcy, and the superintendent was never able to get their hands on OPs 457(b) contributions.
BBurki
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Re: Safety of Government 457(b) to Bankruptcy, Creditors?

Post by BBurki »

VCC wrote: Tue Jan 18, 2022 10:46 pm-Yes.
Thanks!
BBurki
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Re: Safety of Government 457(b) to Bankruptcy, Creditors?

Post by BBurki »

Sprucebark wrote: Tue Jan 18, 2022 11:25 pm This thread is like a boglehead graveyard. Most of the posters have long since vanished.

I was getting excited reading the thread until I saw it was from 2009…

Seems like things turned out ok after all for the LA school district. They ended up not declaring bankruptcy, and the superintendent was never able to get their hands on OPs 457(b) contributions.
Yeah, it was returned in a Google search I did. I was also excited until I saw the date. I was thinking of posting this same question when I found that it'd already been asked, albeit 13 years ago. So I thought I'd just try refreshing it ;-)
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