By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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For some time now, employer-sponsored retirement plans for nonprofit and tax-exempt entities have often looked different than the retirement programs sponsored by for-profit employers. While for-profit employers have successfully replaced traditional pension plans with 401(k) plans as their primary retirement vehicle, nonprofit and tax-exempt groups have been more likely to utilize different retirement plan solutions – such as a 403(b) plan.
The 403(b) plan, also known as a Tax-Sheltered Annuity (TSA), is a common plan design for 501(c)(3) tax-exempt entities (including schools and educational entities, religious organizations, and many charitable groups). 403(b) programs have many similarities with 401(k) plans, but one key distinction is that investment options are limited to mutual funds and annuities. Additionally, 403(b) plans will frequently allow multiple mutual fund and annuity providers* to offer investment options within the plan, with various financial professionals and representatives providing service to participants. This structure can lead to confusion among employees in understanding the approved investment lineup available to them,** and can also create challenges with nonprofit and tax-exempt groups monitoring overall compliance across multiple product and service providers.
These are just some of the issues that have led to a growing trend with nonprofit groups rethinking and updating the structure of their retirement 403(b) programs to make them easier to administer, encourage greater employee participation, and improve plan compliance. As a result, many nonprofit groups are:
- Moving away from featuring multiple product providers with their 403(b) plans (along with an excessive number of investment options) and opting to work with a single investment or product provider.
- Increasingly adopting best practices popular with many 401(k) plan sponsors, including:
- Working with a single and dedicated financial professional to “quarterback” key issues, including a comprehensive process for the selection and monitoring of investment options for the 403(b) plan and plan participant educational services.
- Incorporating plan design features like Roth employee deferral contributions (utilized in 75% of 401(k) plans vs. 46% of 403(b) plans) and socially responsible investment options***.
Additionally, the recently enacted SECURE 2.0 Act has expedited the movement of 403(b) plans for nonprofit groups toward utilizing the best practices and mirroring retirement programs like 401(k)s. The SECURE 2.0 Act intentionally cited 403(b) plans in many of the key retirement provisions of the legislation, including the requirement to offer an automatic enrollment feature, the ability to offer a new emergency savings provision for participants, the opportunity to offer Roth employer contributions and the ability for nonprofit groups to now sponsor a 403(b) Multiple Employer Plan. Now more than ever, nonprofit groups offering a 403(b) plan to their employees will be “playing by the same rules” as for-profit employers sponsoring 401(k) plans.
As nonprofit groups continue the trend of modifying their 403(b) plans to take advantage of industry best practices and legislative enhancements, it is important that these groups consult with a tax or legal advisor and investment professional before establishing a new plan or implementing changes to an existing plan.
*2018 Plan Sponsor Council of America (PSCA) 403b Survey
**Iyenger, Jiang, Huberman ‘How Much Is Too Much?’ Columbia Business School, 2003
***2020 403(b) Plan Survey, Plan Sponsor Council of America
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.