Questions about non-governmental 457b

[Golfing Doc]

Hi everyone. I work for a fairly large healthcare group (12000 employees) that was formed 20-25 years ago. It seems stable to me and they have expanded significantly over the last 10 years years. Household income ranges from 850k-1 mil. I am in my early 30s, married with one child, maxing out a roth 401k (still debating about roth v pre-tax, but probably a topic for another thread), backdoor roth, have a reasonable 15 year mortgage, have about 4 months of expenses in a high interest checking account, am saving in my child's 529, and am investing about 20k a month in a taxable account. I have been considering investing in the company's non-governmental 457b. I am in my early 30s so I was going to delay investing in the 457b and build up a taxable account, but wanted to hear others' opinions. I have not heard of any financial difficulty in the company but I am not truly in the know I suppose and the company has not been around all that long. I have not yet seen the investment options in the 457b, but they are very reasonable in the 401k and include VINIX (institutional S&P index), VFWSX (institutional ex-US fund), and VBTIX (institutional total bond fund), as well as an institutional extended market fund I am considering - VIEIX (mid cap blend). There is a record keeping fee of 0.24% as well. I would assume the options in the 457b are similar, but I am not sure. I have inquired about after tax 401k contributions and they are not allowed.

My question is two-fold...

Should I contribute to the non-governmental 457b assuming they have reasonable investment options?

I know if the company goes under, the money in the 457b goes to the creditors. What happens if the company is bought out?

[jfoxcpacfp]

1. Yes, because at your income level, the deduction is particularly valuable. I believe there is way too much fear of 457b’s on this and other forums. Of course, you need to be aware that, if the company goes under and if the creditors come after the retirement plan, you could lose it. But you also need to know that the chance of this happening is extremely remote and far less probable than the risk of making a bad decision in the next bear market and losing real money by emotional selling.


2. If the company is bought out, the BOD of your NPO will come to an agreement with the new BOD about the handling of the 457b’s in the new business. You will probably be given the opportunity to take out your account balance, penalty-free, or roll over to the takeover NPO’s 457b.

I am a little confused about the original post. If your company has a non-governmental 457b, that means you work for a NPO. NPOs aren’t ‘bought out’ like for-profit businesses and typically don’t ‘go under’ although that is certainly possible. Also, the average income per physician is higher than what I would expect for an organization that is mission-minded. I think we may be missing some information.

[Golfing Doc]

One detail I forgot to add. On separation, the funds in the 457b account are distributed over 10 years

[Golfing Doc]

Thanks for the input Johanna. I was hoping you would chime in. It is indeed an npo. Significant other is a physician as well which explains the high income.

I also was unaware that npo’s aren’t bought out... I was under the impression most hospital systems are technically npo’s but merge and are bought/sold frequently

[FIREshrink]

I would never use a non gov 457b and don't use mine. It's an unnecessary risk. I can easily achieve (have achieved) FI without it. I know others do and feel the odds (gods?) favor them.

A large number of community hospitals are at the brink of insolvency, or were until Obamacare saved them. It's easy to forget how dire health care finances were in the Great Recession. Did you examine your organization's finances at that time? I examined ours, and it wasn't pretty. Margins went from 12% to 3% and our bond rating dropped three notches. We laid off ten percent of our work force , and some physicians, while not strictly terminated, were let go through contract non renewals. My institution is larger and has a much longer history than yours.

If Obamacare is repealed or Medi/Medi are substantially reformed to block grants or individual stipends, neither of which is out of the question if Republicans win the 2020 election, all bets are off.

Certainly consolidation rather than closure will be the rule, and the odds of forfeiture are low. But a wise rule of investing (and life) is to take no unnecessary risk which isn't compensated. In your case, the compensation is minimal barring early retirement or some other period of prolonged and substantially lower income, because you will remain in the highest tax bracket otherwise.

The real question is why you are using a Roth account . If you're searching out more tax deferral in the form of a non gov 457b, why not take the easy one in the form of the 401k?

[q-school]

we had the same questions as the original poster.  after several years of creating a nest egg, we finally caved and started the non government 457.  it didn't radically change anything.  surprisingly, after we started we owed more in taxes, but i'm not sure how much was due to growth of the stock market and other things.  obviously not due to 457 plan.

i hear lots of debates about the roth 401 versus the 401.  as always, there's not a single right answer.  the people advocating for the roth 401 argue taxes are only going to go up in the future and take the pain now.  i am not fully sure they understand the possibility of early retirement offering an opportunity to perhaps take the 403 and convert to ira at a lower rate.  if you never retire early, continue to save, and you make a million a year for 30+ years, it is not likely that you would be able to drop your income enough to go into lower rate category however.

[Raddoc123]

I agree with jfox.  Use the account without question. Good investment options, distribution options, financial standing, and the best part is the tax savings.  There is also asset protection since the money is not technically yours until distribution.   10-11k in reduced take home pay gets you 18.5k in investments.  The final balance of your 457b account will be a tiny % of assets given your high savings.  Chances of account loss are very small.  Never heard an actual 457 loss.

[pulmdoc]

If all the stars align...

1) Employer at very low risk of default (Aa bond rating or similar)

2) The investment options are similar to what you would invest in a taxable account with low expense ratios/low management fees

3) The severance payouts are spread out over several years to avoid a tax bomb

4) There isn't a better use for that money and you can afford for it to be illiquid

Then the tax advantage of a 457b may be worthwhile. I have personally used my employer's 457b for the past three years.

[AR]

FIREshrink wrote:

I would never use a non gov 457b and don’t use mine. It’s an unnecessary risk. I can easily achieve (have achieved) FI without it. I know others do and feel the odds (gods?) favor them.

A large number of community hospitals are at the brink of insolvency, or were until Obamacare saved them. It’s easy to forget how dire health care finances were in the Great Recession. Did you examine your organization’s finances at that time? I examined ours, and it wasn’t pretty. Margins went from 12% to 3% and our bond rating dropped three notches. We laid off ten percent of our work force , and some physicians, while not strictly terminated, were let go through contract non renewals. My institution is larger and has a much longer history than yours.

If Obamacare is repealed or Medi/Medi are substantially reformed to block grants or individual stipends, neither of which is out of the question if Republicans win the 2020 election, all bets are off.

Certainly consolidation rather than closure will be the rule, and the odds of forfeiture are low. But a wise rule of investing (and life) is to take no unnecessary risk which isn’t compensated. In your case, the compensation is minimal barring early retirement or some other period of prolonged and substantially lower income, because you will remain in the highest tax bracket otherwise.

The real question is why you are using a Roth account . If you’re searching out more tax deferral in the form of a non gov 457b, why not take the easy one in the form of the 401k?

Click to expand...

1.  Are you aware of any health care organization's 457b plans being taken by creditors?  I understand that it could happen, but have you ever heard of a single instance.  Even with the tough times your organization went through, did people lose their 457b plans?

2.  I don't understand why you think the risk is uncompensated.   The tax benefits can be quite significant.  The money is not taxed going in.  It grows tax free. And at retirement, you will presumably withdraw from this account exclusively until it is exhausted.  So odds are you will be taxed at a lower rate than when you were earning. That's a lot of tax savings. When weighed against something that is extremely rare (losing the 457b), it seems more than sufficiently compensated.

Most of these tax savings will not be achieved if you leave the organization and go work somewhere else prior to retirement. So the likelihood of that happening should definitely play a role in the decision.  However, even if that happens (which in OP's case is a consideration given his age, but it is definitely less of a concern in many other cases) it seems the rate of these plans being lost is so low, that it is generally probably worth it.

[FIREshrink]

AR wrote:

FIREshrink wrote:

I would never use a non gov 457b and don’t use mine. It’s an unnecessary risk. I can easily achieve (have achieved) FI without it. I know others do and feel the odds (gods?) favor them.

A large number of community hospitals are at the brink of insolvency, or were until Obamacare saved them. It’s easy to forget how dire health care finances were in the Great Recession. Did you examine your organization’s finances at that time? I examined ours, and it wasn’t pretty. Margins went from 12% to 3% and our bond rating dropped three notches. We laid off ten percent of our work force , and some physicians, while not strictly terminated, were let go through contract non renewals. My institution is larger and has a much longer history than yours.

If Obamacare is repealed or Medi/Medi are substantially reformed to block grants or individual stipends, neither of which is out of the question if Republicans win the 2020 election, all bets are off.

Certainly consolidation rather than closure will be the rule, and the odds of forfeiture are low. But a wise rule of investing (and life) is to take no unnecessary risk which isn’t compensated. In your case, the compensation is minimal barring early retirement or some other period of prolonged and substantially lower income, because you will remain in the highest tax bracket otherwise.

The real question is why you are using a Roth account . If you’re searching out more tax deferral in the form of a non gov 457b, why not take the easy one in the form of the 401k?

Click to expand…

1.  Are you aware of any health care organization’s 457b plans being taken by creditors?  I understand that it could happen, but have you ever heard of a single instance.  Even with the tough times your organization went through, did people lose their 457b plans?

2.  I don’t understand why you think the risk is uncompensated.   The tax benefits can be quite significant.  The money is not taxed going in.  It grows tax free. And at retirement, you will presumably withdraw from this account exclusively until it is exhausted.  So odds are you will be taxed at a lower rate than when you were earning. That’s a lot of tax savings. When weighed against something that is extremely rare (losing the 457b), it seems more than sufficiently compensated.

Most of these tax savings will not be achieved if you leave the organization and go work somewhere else prior to retirement. So the likelihood of that happening should definitely play a role in the decision.  However, even if that happens (which in OP’s case is a consideration given his age, but it is definitely less of a concern in many other cases) it seems the rate of these plans being lost is so low, that it is generally probably worth it.

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1. (just my opinion): There will be a day of reckoning for the US Economy, which is, at this point, largely a Ponzi scheme. I don't know what it will look like, or when it's going to happen, but (in my opinion), this time around the health care industrial complex is not going to be exempted. It cannot go on forever that health care expenses grow to become a larger and larger part of our economy. There is simply no way it is sustainable and at some point it is not going to be acceptable to voters that we fund hospitals, doctors, nurses, health care executives, hospital administrators, insurance company shareholders - but not schools, roads, child care, or public safety. Things will shake out. The fact that it has not happened yet does not mean it will not happen. Low probability events are not zero probability events. LTCM was thought to be impossible. A national real estate collapse was thought to be impossible. Lehman Brothers going out of business was thought to be impossible. Until they weren't.

2. The risk is compensated but not adequately unless the OP plans to work at this position until within 10 years of retirement. Barring that, all the income will be taxed at the same rates he would avoid with deferral. So all he gets is the tax deferral on the growth - avoiding tax drag of maybe 50 basis points is not work the substantial risk of forfeiture these plans require. Note every 457b is different. For example, upon separation mine gives me 90 days to make an irrevocable decision about how the 457b should be paid out. My choices are a. take the entire distribution as cash. b. defer the entire distribution until retirement age. or c. choose an annuitized payout. Choice a. negates the tax advantage and choices b. and c. leave my funds at risk for decades. None of these options are tenable and hence, I don't use my 457b.

It's a personal choice everyone has to make. I sleep better at night and reached my goals without taking on the risks of a non-gov 457b so it was the right choice for me.

[AR]

FIREshrink wrote:

The risk is compensated but not adequately unless the OP plans to work at this position until within 10 years of retirement. Barring that, all the income will be taxed at the same rates he would avoid with deferral. So all he gets is the tax deferral on the growth – avoiding tax drag of maybe 50 basis points is not work the substantial risk of forfeiture these plans require.

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OK, so if he does plan to work there within 10 yrs of retirement, then it's fine.  Maybe he does, maybe he doesn't. He's pretty young, so who knows. But there are plenty of people who can make this judgment with some accuracy and find the risk more than adequately compensated by tax savings.

The risk is not substantial. That's not even really a matter of opinion. Even you describe it as "low probability" but not zero.  No one is saying that it couldn't happen, but so far even non-profit hospitals in dire situations haven't had it happen yet, that we know of.  So it's either non-existent or rare.  While it's true that past performance is not a guarantee of future results it does give us some information about what the future might look like.  Based on the collective experience of these plans so far, the risk of loss is minute.

If you try to assign a risk of loss, any reasonable number that you pick, if you run the numbers, will be compensated by the tax savings in many cases (Obviously not all.  As you note, the plans are different and situations are different).  Out of curiosity, what chance do you think there was that you would have lost your 457b before withdrawal.  If you can give us an approximate number, we can have an idea if it is compatible with reality and if the tax savings would compensate it.

It's true that you could choose to pick a relatively high probability out of thin air.  Or just based on some gut-feeling, hunch, etc. that things could go south.  But there is nothing firm to back that up.   I'm not saying that it's won't happen. It's just that the probability is low.

Furthermore the doomsday scenario that you've laid out (i.e., "the day of reckoning for the US economy"), sounds so dire that no matter what you're is invested in and where it is (457b, taxable, etc.) you're going to be screwed.

 

[jhwkr542]

Anybody calling the US economy a Ponzi scheme should probably not be taken seriously on a financial forum.

[FIREshrink]

Shrug. It's my opinion, which you solicited. I'm not going to argue with either of you about it. I said at the outset, people will make their own decisions.

[FIREshrink]

By the way, the word substantial is not my word. It's the word required by the IRS to permit nonqualified money to be tax deferred, and is right there in the plan literature for a non gov 457b.

[AR]

FIREshrink wrote:

Shrug. It’s my opinion, which you solicited. I’m not going to argue with either of you about it. I said at the outset, people will make their own decisions.

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It's obvious no one is going to change your mind.  However, not all opinions have equal merit.  If you post an opinion that doesn't make a lot of sense, even you choose not to respond, I don't know why you are surprised that people would comment on it.