When deciding whether to use your 457(b) or not, the first question to address is whether the 457(b) plan is a governmental or a nongovernmental plan. Governmental plans are pretty much better in every respect, but perhaps the greatest advantage is that when you leave the employer, you can roll a 457(b) into a traditional IRA or other retirement account. That is not the case for a non-governmental 457(b). You might be able to roll it into another non-governmental 457(b), but you should assume that the money will be in this 457(b) until it is withdrawn. In addition, the assets in a governmental 457(b) are held in trust for the employee, just like a 401(k). That is not the case with a non-governmental 457(b). Those funds are subject to the employer’s creditors. For this reason a 457(b) provides excellent asset protection against your creditors, but it provides no protection at all against an employer’s creditors. I have been searching for years for a doctor who actually lost 457(b) money to an employer’s creditors and have not yet found one, but it is a theoretical risk. The bottom line is that if your 457(b) is a governmental 457(b) like that offered by most university hospitals, go ahead and use it just like another 401(k). If it is a non-governmental 457(b), you need to look at it more carefully before deciding to use it.

What Should You Look For? Four Things Primarily:

1. Stability of the employer
2. Distribution options
3. Investment options
4. Fees

Since this money is subject to the creditors of the employer, if the employer seems to be going bankrupt, you may want to limit how much money you put into the 457(b). While the upfront tax break is great, and tax-protected growth can really boost your after-tax investment returns, the return of your principal matters more than the return on your principal. If your employer is not paying its bills (and it cannot hide this fact long from the physicians and other staff working at a hospital), I would recommend against using the 457(b).

Next, check out what the distribution options are. Essentially, you want flexibility and the ability to spread out distributions over at least five years. Otherwise, you may end up having to take all of the money out in a single year and pay taxes on most of it at a high rate. 457(b) distribution options have tremendous variation. Make sure the options offered by the plan are acceptable to you.