What distinguishes unfunded 457 plans from funded plans?

Unfunded 457 plans are primarily distinguished by the fact that their assets are subject to the general creditors of the employer. In an unfunded plan, contributions and benefits are not secured by separate trust assets; instead, they represent a promise from the employer to pay benefits in the future. Therefore, if the employer faces financial difficulties or bankruptcy, the vested benefits may be at risk, as they do not have specific assets reserved to pay for these benefits.

In contrast, a funded 457 plan typically involves contributions being deposited into a trust or account that is separate from the employer's other assets, offering greater security for participants. The distinction of asset allocation and security is key in understanding how unfunded plans expose participants to employer risk, hence the significance of the correct choice.