Pension puzzle: Part 1

Nonprofits face tough choices in selecting retirement plans.

[Editor’s note: This is the first article in a series on retirement plans for nonprofits.]

By Todd Cohen

[03.25.04] — Wanting to give its 10 employees a lot of options for investing their tax-deferred retirement dollars, the Maryland Center for Arts and Technology in Baltimore selected a 401(k) plan rather than a 403(b) plan.

The Connecticut Association of Nonprofits in Hartford, believing 401(k) plans can be more difficult to administer, generally recommends that its 530 members use 403(b) plans.

And Access, a nonprofit in San Diego that offers its 30 employees a 403(b) plan, recently added a 457 plan solely to boost the pension of its CEO boost his pension as he nears retirement.

“I think the people that really understand the difference between 403(b)’s and 401(k)’s are few and far between,” says Nancy Hall, director of finance, marketing and members services for the Baltimore-based Maryland Association of Nonprofit Organizations. “You have to be some sort of tax maven to understand the difference.”

Welcome to the world of nonprofit retirement benefits.

Long limited by federal law to 403(b) plans, nonprofits face more complicated choices in the wake of a 1997 federal law that lets them offer 401(k) plans once available only to businesses.

While nonprofit officials and retirement experts said they generally saw little difference between 403(b) and 401(k) plans, they also said nonprofit employers should think carefully about retirement benefits, ask for help before making decisions and keep their plans simple.

“The only dumb question you can ask is the one that you don’t ask,” says Steve Fulkrod, director of administration for the Maryland Center for Arts and Technology.

Surging Market 

Nonprofits used to have a tough time getting retirement plans.

In 1918, concerned that college faculty had to work all their lives because they were not paid enough to save for retirement, philanthropist Andrew Carnegie helped create and endow the Teachers Insurance and Annuity Association.

Schools and their employees would contribute money that TIAA would invest for their retirement.

Today, TIAA-CREF, a nonprofit insurance and investment firm in New York City, manages more than $290 billion in assets, including $262 billion in 403(b) assets that represent nearly half the 403(b) market.

And in 1945, concerned with the lack of pension plans designed for nonprofits, the Community Chest made a grant to create the National Health and Welfare Retirement Association to provide retirement benefits for employees of health and welfare social-service organizations.

New York City-based Mutual of America, which grew out of the association, now manages retirement plans for roughly 12,000 nonprofits, with the average account providing coverage for 25 to 30 participants

Joining TIAA-CREF and Mutual of America in the nonprofit retirement market have been a growing number of mutual funds, insurers and other financial-services firms such as Fidelity, Vanguard, AIG VALIC, Lincoln National and The Principal Financial Group.

Mutual offers 403(b) and 401(k) plans, along with other “full-service” retirement plans, and the 401(k) plan “appears to be the product of choice,” says William Conway, executive vice president for marketing and communications.

A big part of the reason, he says, is that nonprofit board members may be more familiar with 401(k) plans through their own employers.

Gary Mauger, Denver-based vice president of client services for TIAA-CREF, says executives of smaller nonprofits typically wear many hats, such as human resources, purchasing and other financial functions, and often look for “turn-key” retirement plans that offer good service and products but require little maintenance.

“That’s typically a 403(b) plan,” he says.

Ninety-five percent of TIAA-CREF’s nonprofit clients use 403(b) plans, he says.

Unlike 401(k) plans, he says, 403(b) plans have simplified reporting and disclosure requirements for the Internal Revenue Service and U.S. Department of Labor.

A nonprofit with a 401(k) plan, for example, typically must have its retirement plan audited every year, and submit to the IRS a “complicated and extensive” Form 5500 information return for the plan. That annual audit is not required with a 403(b) plan, he says.

“Other than that, the 401(k) and 403(b) are very similar,” he says.

NEXT: Selecting a Retirement plan and vendor can be tough. 

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