By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
Retirement plans for nonprofit groups and tax-exempt entities can often look different than the retirement programs used by for-profit employers. While 401(k) plans have become very popular with many corporate and for-profit businesses, nonprofit groups can utilize additional retirement plan options with their employees. Although flexibility in plan design options is often viewed as a benefit for nonprofit groups, it can also result in some unique challenges.
One example that highlights those challenges is the 403(b) plan (also known as a Tax-Sheltered Annuity) which is a common plan design for 501(c)(3) tax-exempt entities, including schools and educational entities, religious organizations, and many charitable groups. Increasingly, nonprofits sponsoring 403(b) plans are exploring opportunities to update and modernize their retirement programs to make them easier to administer, encourage greater participation and improve plan compliance.
By design, 403(b) plans are limited to mutual funds or annuities as investment options, and it is common for nonprofit groups to permit their 403(b) plans to allow employees access to multiple product providers, which are often serviced by various financial professionals and representatives.* All too often, the selection of the product providers for these 403(b) programs is random, with little coordination or consultation with an investment professional that could assist in establishing and reviewing a comprehensive investment menu.
A growing number of nonprofit groups sponsoring 403(b) plans are now beginning to recognize that monitoring compliance across multiple product and service providers can be challenging and can also increase the chance of IRS and DOL fiduciary compliance violations. Additionally, studies (like one conducted by Columbia University **) have shown that too many investment options can negatively effect on participation and overall savings rates.
These issues have created a trend with nonprofit groups now rethinking and updating the structure of their 403(b) plans to be more efficient, while closely mirroring retirement programs like 401(k) plans. 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 contributions (utilized in 75% of 401(k) plans vs. 46% of 403(b) plans), automatic enrollment (utilized in 60% of 401(k) plans vs. 24.4% of 403(b) plans) and socially responsible investment options.***
As nonprofit groups continue the trend of modifying their 403(b) plans to take advantage of plan design best practices and features, 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