Are There Restrictions on 457(b) Plan Investments?

“We are a public university that maintains a 403(b) plan and a 457(b) plan. We realize that plan investments in our 403(b) are generally restricted to annuities and mutual funds. Are 457(b) investments similarly restricted?”

In general, federal law does not regulate what investments may be held for an eligible 457(b) plan. Specifically, there is nothing in Internal Revenue Code Section 457 that would restrict investments in 457(b) plans in a fashion similar to 403(b) plans. In fact, there is nothing in IRC Section 457 that would appear to restrict investments in 457(b) plans at all.

However, a plan sponsored by a public university (i.e., a state or a political subdivision of a state) may be subject to state-level investment restrictions applicable to governmental 457(b) plans. In general, states exercise a high degree of regulation over governmental plans. Further, because IRC Section 457(g) requires governmental employers to fund their 457(b) plans, courts may consider this requirement in applying investment restrictions to governmental 457(b) plans. 

As a general matter, any restrictions applicable to governmental 457(b) plan investment options likely derive from different constructions of a similar concept—that investors must act prudently under the circumstances and in a manner that is reasonable and in the best interests of the plan participants and beneficiaries. States enforce different versions of these concepts, raising differing fiduciary duty implications, and slight variations may affect eligible investment options. As such, it is imperative to consult with local counsel to understand the interplay of these rules and, more specifically, how these rules affect the eligible investment options. In addition, states may have certain conflict of interest rules that may limit governmental 457(b) plan investment options.

Finally, you should consider that there are practical issues with the administration of life insurance contracts, which is why you typically do not see such investments in 457(b) plans. Recordkeepers/third-party administrators could restrict the availability of these as well as certain other types of investments, so you should check your service agreements and contact your recordkeeper/TPA in this regard.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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