Safety of 457(b) account

[ripper1]

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?

 

[kongmen]

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.

 

[nun]

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.

 

[karluk]

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.

 

[ripper1]

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).

 

[karluk]

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.

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]

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.

 

[ripper1]

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.