Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Safety of 457(b) account
Old 07-16-2013, 09:17 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Location: Chicago
Posts: 1,154
Safety of 457(b) account

I have a 457(b) account from when I worked for the City of Chicago from Nationwide. Through discussions with a rep there I was told that these accounts were safe from creditors of Chicago. She was a little vague though when it came to Nationwide going insolvent or bankrupt. Anybody have any dealings with Nationwide or 457(b) accounts?
ripper1 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-17-2013, 03:39 AM   #2
Recycles dryer sheets
 
Join Date: Oct 2010
Location: Columbus
Posts: 159
I have one of these as well in the state of ohio and have been unable to get that same question answered so I will be watching this thread.
kongmen is offline   Reply With Quote
Old 07-17-2013, 08:35 AM   #3
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,872
You own your 457b, so if your government/state employer gets into financial difficulty your 457b will be safe from creditors.

I don't know about its safety wrt Nationwide. I assume that's exactly the same as with any administrator and retirement account.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 07-17-2013, 09:08 AM   #4
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 681
Quote:
Originally Posted by nun View Post
You own your 457b, so if your government/state employer gets into financial difficulty your 457b will be safe from creditors.

I don't know about its safety wrt Nationwide. I assume that's exactly the same as with any administrator and retirement account.
I'm not a lawyer, so perhaps i'm not qualified to offer an opinion, but to me the key point is that "you own your 457b". That means that a 457b custodian such as Nationwide has no more claim on your 457b than the state or local government that you work for. If Nationwide were to go bankrupt, its creditors would have a claim on Nationwide's assets, not yours. So your 457b is not in any danger at all from the risk of Nationwide going bankrupt.
karluk is offline   Reply With Quote
Old 07-17-2013, 10:24 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Location: Chicago
Posts: 1,154
The part that I was concerned about had more to do with the stable value fund because it is an insurance contract of sorts or some kind of wrap of insurance but still part of the 457(b).
ripper1 is offline   Reply With Quote
Old 07-17-2013, 12:13 PM   #6
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 681
Quote:
Originally Posted by ripper1 View Post
The part that I was concerned about had more to do with the stable value fund because it is an insurance contract of sorts or some kind of wrap of insurance but still part of the 457(b).
I see your point. The underlying assets of a stable value fund are the the bonds that the fund owns. I may be missing a few subtleties in how they work, but basically the wrapper agreement allows investors to buy and sell their holdings in the stable value fund at the par value of the bonds, rather than at the bonds' current market value. As a result, stable value funds in normal times behave similarly to money market funds, but with bond-like yields.

If the insurance company behind the wrapper agreement were to go bankrupt, the stable value fund would still own the bonds that are the underlying assets of the fund, but would no longer be able to pay redemption requests at par. Instead they would have to sell the bonds on the open market and so the asset value of the stable value fund would fluctuate in the same way as a bond fund.

Here is an excerpt from the prospectus of my own stable value fund regarding investment contract risk.

Quote:
Investment Contract Risk. The Fund purchases Investment Contracts from financial institutions. These contracts are designed to enable the Fund to utilize contract value, rather than the market value of the Underlying Assets, when determining the Fund’s value for participant transactions. While these contracts normally allow for contract valuation, there can be no assurance this valuation can be maintained in certain circumstances.
To me the take away from all of this legalese is that stable value funds are relatively safe, but do not have the same level of security as an FDIC insured bank account or treasury bill. I looked into the risks of my stable value fund several years ago and decided to continue using it for most of my fixed income investing, but to also have a generous share of regular bond funds in my portfolio, so as to not put all of my eggs in one basket.
karluk is offline   Reply With Quote
Old 07-17-2013, 12:39 PM   #7
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 681
As food for thought, you might want to ponder what might have happened in late 2008 if the U.S. government had decided to let AIG go bankrupt instead of providing the cash for a major bailout. I have no way of proving or disproving this, but my expectation at the time was that an AIG bankruptcy would have resulted in numerous stable value funds being forced to let their share price fluctuate on the open market. Taken in isolation, this might not have been too serious, but considering how jittery the market was back then, it might very well have led to a major panic as small investors watched their supposedly "safest" investments lose value.
karluk is offline   Reply With Quote
Old 07-17-2013, 02:16 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Location: Chicago
Posts: 1,154
Quote:
Originally Posted by karluk View Post
I see your point. The underlying assets of a stable value fund are the the bonds that the fund owns. I may be missing a few subtleties in how they work, but basically the wrapper agreement allows investors to buy and sell their holdings in the stable value fund at the par value of the bonds, rather than at the bonds' current market value. As a result, stable value funds in normal times behave similarly to money market funds, but with bond-like yields.

If the insurance company behind the wrapper agreement were to go bankrupt, the stable value fund would still own the bonds that are the underlying assets of the fund, but would no longer be able to pay redemption requests at par. Instead they would have to sell the bonds on the open market and so the asset value of the stable value fund would fluctuate in the same way as a bond fund.

Here is an excerpt from the prospectus of my own stable value fund regarding investment contract risk.



To me the take away from all of this legalese is that stable value funds are relatively safe, but do not have the same level of security as an FDIC insured bank account or treasury bill. I looked into the risks of my stable value fund several years ago and decided to continue using it for most of my fixed income investing, but to also have a generous share of regular bond funds in my portfolio, so as to not put all of my eggs in one basket.
Karluk, thank you for your input. I do pretty much what you do. 60% of my fixed income is now in stable value yielding 3.22% and the rest in a total bond fund. I think I am a little more comfortable now with my 457. I like the flexibility of having the stable value fund in there.
ripper1 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


» Quick Links

 
All times are GMT -6. The time now is 06:39 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.