How secure is my 403(b)? Can its assets be “raided”?

Question

I work at a state university and contribute to my 403(b) retirement account on a twice-monthly basis, maxing out the matching funds. I also contribute a smaller amount to another account, after matching funds.

My question is about the 403(b) account. I read nowadays about pensions being raided, specifically when state or local governments run out of money, and the government ends up inventing or interpreting laws in such a way that faceless corporations get paid before pension holders, regular people who end up effectively losing their retirement funds.

Given how many legal restrictions there are on withdrawing from my 403(b) account, as well as transferring funds from an old 403(b) account from one company (TIAA/CREF) to another (Fidelity), what is the likelihood of a state or local government that defaults on its bonds or other financial obligations ending up making use of my 403(b) funds (or the matching portion paid by the state government) to pay off corporate creditors, and thus effectively debiting at will from my retirement?

Can I trust that my 403(b) account won't get raided the way that pensions (like those in Detroit) have been raided?

Note:

• I have not stated anywhere in my question that a 403(b) is a pension; I am also not asking if a 403(b) is a pension
• I do not watch Fox News

Answer 1

The simple answer is that with the defined contribution plan: 401k, 403b, 457 and the US government TSP; the employer doesn't hold on to the funds. When they take your money from your paycheck there is a period of a few days or at the most a few weeks before they must turn the money over to the trustee running the program. If they are matching your contributions they must do the same with those funds.

The risk is in that window of time between payday and deposit day. If the business folds, or enters bankruptcy protection, or decides to slash what they will contribute to the match in the future anything already sent to the trustee is out of their clutches.

In the other hand a defined a benefit plan or pension plan: where you get X percent of your highest salary times the number of years you worked; is not protected from the company. These plans work by the company putting aide money each year based on a formula. The formula is complex because they know from history some employees never stick around long enough to get the pension.

The money in a pension is invested outside the company but it is not out of the control of the company. Generally with a well run company they invest wisely but safely because if the value goes up due to interest or a rising stock market, the next year their required contribution is smaller. The formula also expects that they will not go out of business. The problems occur when they don't have the money to afford to make the contribution. Even governments have looked for relief in this area by skipping a deposit or delaying a deposit.

There is some good news in this area because a pension program has to pay an annual insurance premium to The Pension Benefit Guaranty Corporation a quai-government agency of the federal government. If the business folds the PBGC steps in to protect the rights of the employees. They don't get all they were promised, but they do get a lot of it.

None of those pension issues relate to the 401K like program. Once the money is transferred to the trustee the company has no control over the funds.

Answer 2

I assume you get your information from somewhere where they don't report the truth. I'm sorry if mentioning Fox News offended you, it was not my intention. But the way the question is phrased suggests that you know nothing about what "pension" means. So let me explain.

403(b) is not a pension account. Pension account is generally a "defined benefit" account, whereas 403(b)/401(k) and similar - are "defined contribution" accounts.

The difference is significant: for pensions, the employer committed on certain amount to be paid out at retirement (the defined benefit) regardless of how much the employee/employer contributed or how well the account performed. This makes such an arrangement a liability. An obligation to pay. In other words - debt.

Defined contribution on the other hand doesn't create such a liability, since the employer is only committed for the match, which is paid currently. What happens to your account after the employer deposited the defined contribution (the match) - is your problem. You manage it to the best of your abilities and whatever you have there when you retire - is yours, the employer doesn't owe you anything.

Here's the problem with pensions: many employers promised the defined benefit, but didn't do anything about actually having money to pay. As mentioned, such a pension is essentially a debt, and the retiree is a debt holder. What happens when employer cannot pay its debts? Employer goes bankrupt. And when bankrupt - debtors are paid only part of what they were owed, and that includes the retirees.

There's no-one raiding pensions. No-one goes to the bank with a gun and demands "give me the pension money". What happened was that the employers just didn't fund the pensions. They promised to pay - but didn't set aside any money, or set aside not enough. Instead, they spent it on something else, and when the time came that the retirees wanted their money - they didn't have any. That's what happened in Detroit, and in many other places.

403(b) is in fact the solution to this problem. Instead of defined benefit - the employers commit on defined contribution, and after that - it's your problem, not theirs, to have enough when you're retired.