If you Google “nonprofit financial wellness,” you’ll find a laundry list of resources on nonprofit accounting, financial statements, and financial literacy programs for the public. Missing from this list are references to the financial wellness of nonprofit employees. Ironically, while nonprofit leaders are working to secure long-term organizational financial stability, and in some cases, even providing financial literacy programs to the community, many employees who tirelessly serve their organizations’ respective missions are falling behind on securing their own long-term financial well-being.
An Issue Exacerbated
It’s no secret that many Americans are ill prepared for retirement. Employees at nonprofits are no different, and maybe even more challenged, for several reasons:
- Nonprofit employees receive relatively low wages—the average salary for a program coordinator is $39,000,* making the deferral of any income an immediate sacrifice.
- Lean management teams and volunteer boards are juggling multiple responsibilities—While tasked with overseeing the retirement plan—complying with often-changing rules and facing increasing regulatory scrutiny—their main focus is servicing the organization’s mission.
- High rates of turnover make getting and keeping employees enrolled in retirement plans difficult—this is a self-reinforcing loop that greatly costs organizations.
- Nonprofit employees tend to have little exposure to investing—unlike certain other industries, there is little natural exposure to investing and financial planning concepts in the daily work of many nonprofit employees.
With this backdrop, it’s not surprising that the participation rate in retirement plans among nonprofit employees is low, coupled with broadly low allocation to growth assets—critical components to establishing a secure retirement.
So, what can nonprofit leaders do to help secure the long-term financial wellness of their employees? We focus on the “Three D’s” to help build and maintain a successful retirement plan.
The Three D’s
The organization responsible for the retirement plan—the plan sponsor—has three main tasks: define its role and responsibilities, perform due diligence, and demonstrate a process and procedure for operating the plan.
Defining Roles and Responsibilities
Most nonprofits offer defined contribution 403(b) retirement plans, which are very similar to 401(k) plans. These fall under the Employee Retirement Income Security Act (ERISA), which is overseen by the Department of Labor. Part of the statute talks about the organization’s role as a plan sponsor—its fiduciary duty.
A representative of the plan sponsor becomes a fiduciary under ERISA in one of two ways: by assuming a specifically designated role or by taking an action that is fiduciary in nature. Specifically, designated roles include the named fiduciary that has authority to control and manage the operation and administration of the plan, a trustee, and investment managers and advisors. Actions that can cause a fiduciary role include any exercise of discretionary authority over administration or management of the plan or its assets. In short, a fiduciary makes decisions on behalf of plan participants and is legally responsible for doing so in their best interest.
At nonprofits, fiduciary responsibility often rests with the Board, although it can delegate that responsibility to a committee within the Board or an external agent. Surprisingly, some Boards or committees are unaware of their fiduciary roles. In a recent survey, we asked plan sponsors if they considered themselves plan fiduciaries. Only 44% answered “yes,” while 49% responded “no,” and the rest didn’t know. In reality, 100% of the respondents were fiduciaries. **
Nonprofit leaders should ask: Do we have the expertise and capacity necessary to fulfill our fiduciary role? If the answer is no, then it’s the duty of leadership to partner with an advisor or service provider.
Whether a partner serves in an administrative capacity or as an investment advisor, finding the appropriate one requires due diligence.
Administrative duties include a range of tasks—from creating and filing the Form 5500 to fee disclosures. “Most organizations tend to outsource these functions,” comments Bernstein advisor Darryl Rodgers, “especially record keeping. This is the plumbing of the operations responsible for account balances, transactions, fee disclosures, and payroll, for example.”
Another crucial aspect to due diligence is ongoing monitoring of the plan and investment lineup. From lack of asset class diversification and investment conflict, to worries about single manager concentration and cushioning investment loss, many sponsors are stretched thin and overwhelmed. Partnering with a third-party investment manager or advisor in a co-fiduciary capacity requires continued oversight but significantly relieves the burden.
Beyond the investment lineup, due diligence of an investment partner should also include a review of their education strategy. “What we’ve found is that…if employees are not getting one-on-one engagement, odds are they’re not doing what’s necessary—budgeting, financing a home, and satisfying daily spending—for financial wellness,” says Rodgers, “and if they’re not engaged fully, they’re going to leave and take a job that pays more money with a better benefit package because they don’t feel like their retirement is secure.” The process for educating participants should answer the fundamental question: How do your employees know if they are on track for their retirement goals?
Demonstrating Process and Procedures
In addition to the educational process, establishing and adhering to operating procedures for the investment and administration roles is required for plan success. This includes creating an investment policy statement that features key information like plan objectives, asset allocation, risk tolerance, and liquidity requirements. Likewise, administrative procedures for all transactions such as the transmission of employee contributions should be clearly communicated. Additionally, a schedule for regular re-enrollment accompanied by advice on contribution levels and investment selection should also be spelled out. For employees, this sample three-step process may offer guidance:
1. Get started. Auto-enrollment is one plan design feature that organizations can implement to jumpstart participation. Consider a re-enrollment period as well.
2. Pick an Investment Plan. Walk through the investment choices with your investment partner. Target date funds are one way to ensure a diversified portfolio including growth assets based on an individual’s specific time horizon.
3. Contribute: a little goes a long way! One rule of thumb is 10%–15% of salary, with automatic increases annually (1%–2%). Assuming a $40,000 annual salary and a 6% annual return in a tax-deferred account, an employee with a 6% contribution rate ($46/week), can expect a $400,000 portfolio after 40 years.***
The Ultimate Goal
Ask any leader to name the organization’s most valuable asset, and the most likely answer will be, “the people.” Unfortunately, there’s no ‘one size fits all’ to retirement planning, but the basics of the “Three D’s” provide a framework for building a successful plan that is customized for each organization’s unique employee population. Because at the end of the day, serving the employees who serve the organization achieves the ultimate goal—mission first, people always.
**AB’s 2016 survey of 1,000 DC plan sponsors
***This hypothetical example is not indicative of any product or performance and does not reflect any expenses associated with investing. Taxes will be due upon distribution. It is possible to lose money investing in securities.
For more on timely topics for nonprofits, explore “Inspired Investing”, a Bernstein podcast series that covers investing, spending, policy and more for Endowments & Foundations, and for additional thought leadership, check out the related blogs here.
- Clare Golla
- Managing Director—Head of Foundation & Institutional Advisory Services