(b)lines Ask the Experts – Are 403(b) Accounts Insured?

 Michael A. Webb, vice president, Cammack Retirement Group, answers:        

Unlike bank deposit accounts, such as checking and savings accounts, 403(b) plan accounts are NOT insured at the federal level. However, it is important to realize that 403(b) plan accounts are structured differently than bank deposit accounts, which are part of the asset of a bank and thus would be subject to creditors in the event of insolvency, if not protected by insurance.

For example, 403(b)(7) custodial accounts (more commonly known as mutual funds), are held in accounts that are fully segregated from the assets of the investment provider. Thus, should the investment provider become insolvent, the assets are protected from creditors. However, should an investment provider encounter financial difficultly, this could reflect negatively on the mutual fund performance itself, resulting in an investment decline in the value of the mutual fund(s).

As for the other type of investment offered in a 403(b) plan, a 403(b)(1) fixed/variable annuity, there are differences from a traditional bank deposit account as well. 403(b)(1) variable annuities are generally invested in accounts that are fully segregated from the assets of the underlying investment provider, as well as the insurer who is providing the insurance component of a variable annuity. As with 403(b)(7) accounts, should the underlying investment providers become insolvent, the assets are generally protected from creditors. Should the insurer of the variable annuity become insolvent, the insurance component of the variable annuity might be affected, but again the underlying investments would be protected in a fashion similar to a 403(b)(7) custodial account.

403(b)(1) fixed annuities are slightly different, since the investment  provider itself is an insurance company. In some cases, the annuity assets are invested in an account that is segregated from the general assets of the insurer, in which case such assets would be protected from the creditors of insurers in a fashion similar to 403(b)(7) custodial accounts. However, many 403(b)(1) fixed annuities are general accounts, meaning that such assets are indeed subject to the creditors of the insurer in the event of insolvency.

However, even in the event an insurer becomes insolvent, it is quite possible that the state in which the insurer resides would step in at that point to protect account balances through an entity called a guaranty association that is set up for this specific purpose. However, there is no guarantee in this event that investments would be completely protected, and it may take years for participants to receive their funds.  It is a small risk, but if participants are concerned about such a risk, they may wish to refrain from investing in an insurance company general account if such investment is made available in their 403(b) plan.