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  • Non-Governmental 457b

    Hey all,

    I know this gets kicked around a bit but had a few questions regarding a non-gov 457b.

    For context, I am a W2 employee and my marginal tax rate will be 37% for 2022. I am maxing out my 403b, HSA, backdoor Roth and spousal backdoor Roth, and really my only other options for retirement savings are in a taxable account or my employers non-gov 457b.

    I reviewed the plan document and I think the distribution options are reasonable: - Can defer distribution anywhere from 60 days after termination to age 72 - May be taken as a lump sum or in annual installments over up to 10 years - You may make 1 irrevocable election to further defer distribution beyond your initial distribution date (but may not make it earlier or accelerate it).

    The main concern I have is the liability of the plan to creditors. My employer is a large regional system and has a bond rating of A1/A+ (Moody’s/S&P) both with stable outlook. My understanding is that this puts their bond rating square in the middle of what would be considered an investment grade bond. My main question relates to how do you assess the creditor liability in using a non-gov 457b? Is there a bond rating below which you wouldn’t use it? I don’t have any considerable inside knowledge as to the financial health of the institution beyond this, other than a general gestalt of “nobody is happy right now” which seems to be the case almost everywhere at the moment. Would appreciate any insight anyone might be able to give. I’m leaning toward utilizing it given the distribution flexibility (if I were to leave I was thinking make the deferred distribution age 50 and if I were to decide to keep working just push it to normal retirement age).

  • #2
    I just looked at the Moody rating and called it good. My system is Aa1. Does your system have a Form 990 publicly available? The Form for 2020 for my system looks like it will probably be posted in a month or two, you may want to look that over before you pull the trigger on investing.

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    • #3
      The liability of the nongovernmental 457b to creditors is real, but I’ve never actually heard of a bankruptcy affecting such a plan. But sure, it could. I use mine, but I also actually have a lot of inside knowledge and a fair amount of control over our institutional financial success. Flip side, bear in mind that the 457b gives you tax deferral but not much else. Over the long term towards retirement that is a genuine advantage, but taxable accounts have advantages of their own: deferred capital gains, long term capital gains rates, possible stepped up basis, freedom of choice on investments and withdrawals.

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      • #4
        I guess it’s also worth asking yourself which is more likely - that the hospital loses assets to their creditors, or you lose assets to your creditors. While a NG 457b is exposed to hospital creditors, if you lose a malpractice suit over policy limits or your umbrella insurance isn’t sufficient, the 457b would be protected. Not even sure it would count as your asset in a divorce.

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        • #5



          457b plans are not ERISA qualified plans and creditor asset protection is subject to state jurisdiction. Non-governmental 457b plans are less likely to receive full state protection.

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          • #6
            Originally posted by Lithium View Post
            I just looked at the Moody rating and called it good. My system is Aa1. Does your system have a Form 990 publicly available? The Form for 2020 for my system looks like it will probably be posted in a month or two, you may want to look that over before you pull the trigger on investing.
            What specifically do you look at on the form 990 to assess the financial health of an organization? Obviously you can look at total assets to total liabilities, but is there more nuance to it than that? Looking at trends from year to year?

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            • #7
              Originally posted by Michio88 View Post

              What specifically do you look at on the form 990 to assess the financial health of an organization? Obviously you can look at total assets to total liabilities, but is there more nuance to it than that? Looking at trends from year to year?
              It’s a tax return. It reports both total income and total expenses. Not that tax reporting is the same as the audited financials, but it is an indication of financial health.

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              • #8
                Originally posted by Michio88 View Post

                What specifically do you look at on the form 990 to assess the financial health of an organization? Obviously you can look at total assets to total liabilities, but is there more nuance to it than that? Looking at trends from year to year?
                I think that’s mostly it. If you suddenly see revenue falling and key officers taking pay cuts, it’s obviously not a good sign. But I’d expect that to be reflected in the bond rating as well. You can also compare the Form 990 to that of hospitals that have closed due to financial losses (which isn’t the same as bankruptcy). Here is one, you can google some others: https://projects.propublica.org/nonp...ions/273469483

                Also, when I looked mine up, my jaw absolutely dropped when I saw how much the key employees in the C suite made.

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                • #9
                  Originally posted by Michio88 View Post
                  I reviewed the plan document and I think the distribution options are reasonable: - Can defer distribution anywhere from 60 days after termination to age 72 - May be taken as a lump sum or in annual installments over up to 10 years - You may make 1 irrevocable election to further defer distribution beyond your initial distribution date (but may not make it earlier or accelerate it).

                  The main concern I have is the liability of the plan to creditors. My employer is a large regional system and has a bond rating of A1/A+ (Moody’s/S&P) both with stable outlook. My understanding is that this puts their bond rating square in the middle of what would be considered an investment grade bond.
                  Given these factors, I'd be inclined to use the 457b if the offered investment options are good. The risk would not appear to be excessive.

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                  • #10
                    I think taxable accounts are underrated

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                    • #11
                      I just looked up my hospital and it's A1 also. I also have heard multiple times how we're in good financial standing, and always have been. So I felt ok from that angle. But also the tax hit was just too large to ignore. Pretax was $19.5k (last year), post-tax $11.5K. I think the risk is worth it. Partly also because so far it's a relatively small amount in the account. Maybe at a certain point I'll stop contributing. But I plan to use it as my early retirement bridge.

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                      • #12
                        Originally posted by Lithium View Post
                        Also, when I looked mine up, my jaw absolutely dropped when I saw how much the key employees in the C suite made.
                        Key employees hmmm

                        OP I'd probably do it with your hospital credit rating and good distribution options

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                        • #13
                          Originally posted by auggie1983 View Post
                          I think taxable accounts are underrated
                          This. Totally agree. I would set at least some minimum amount for taxable investments (after standard tax-deferred maxed out) annually. If there is more to save/invest beyond that, then throw some at the 457 for a few years. I’m not sure I’d want a decade or more of maxed 457 contributions over taxable investments. The flexibility of taxable investing is underrated. It’s nice to have some of each: tax-deferred, tax-free and taxable.

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                          • #14
                            Are 457s only open to creditors in bankruptcy? Or, can a private equity firm or another hospital system take over my hospital/clinic and say they no longer need to honor the previous contributions to the 457? That is a bigger concern for me compared to the hospital/clinic going bankrupt.

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                            • #15
                              Originally posted by happycampers View Post
                              Are 457s only open to creditors in bankruptcy? Or, can a private equity firm or another hospital system take over my hospital/clinic and say they no longer need to honor the previous contributions to the 457? That is a bigger concern for me compared to the hospital/clinic going bankrupt.
                              No, they have to honor previous commitments. On the other hand, new management could come in and eliminate the 457 going forward. But that still would not affect your previous contributions.

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