Retirement savings plans sponsored by many nonprofit employees are about to get a dramatic makeover. Employers need to prepare—and soon—so they can concentrate more fully on the caregiving business. The IRS has issued long-awaited regulations that will make the 403(b) savings plan look more like its 401(k) cousin.
Here are some of the changes impacting today’s nonprofit retirement community executive:
If you are a nonprofit retirement community executive, you will soon be fully responsible as the plan fiduciary for the organization’s retirement plan. Your primary concern about the current 401(k) environment should be not to show fiduciary indifference and the lack of fee disclosure. Today’s retirement plan fiduciaries must deal with a more complex regulatory and investment environment than ever before. This challenge has motivated many executives of tax-exempt organizations to engage the services of an independent fee-only retirement plan investment consultant. He or she can function as a plan fiduciary and “prudent expert” to the plan, and can assist sponsors in meeting their ERISA fiduciary duties.
“True prudent fiduciary practices should deliver optimal results. Poor or partial fiduciary practices will deliver sub-optimal or even poor results,” notes written testimony from the March 6, 2007, congressional hearings on “Are Hidden Fees Undermining Employee Retirement Income Security?”
For-profit entities have utilized the services of independent retirement investment consultants for the past two decades. Nonprofit retirement communities can leverage the independent consultant’s extensive knowledge base, and in so doing, free themselves of these new and increasing fiduciary oversight responsibilities, so they can focus on retaining employees and serving seniors.
The retirement plan industry has failed to provide clear and easy-to-understand fee disclosure. Plan providers, brokers, brokerage firms, insurance companies, mutual fund companies and third-party administrators and other non-fiduciaries have all contributed to this problem. Unfortunately, the retirement security of millions of plan participants has been put at risk because of hidden fees, high expenses, conflicts of interest and poor investment returns.
For employees who invest through a 403(b) plan, the changes will mean clearer explanations of plan rules and possibly even lower cost investment options. However, sponsors and employees will lose much of the flexibility they now have to move their assets to any investment manager offering a 403(b) vehicle.
The new rules bring 403(b) plans more in line with the requirements of 401(k) plans, forcing plan sponsors to take a more active role in plan administration and fiduciary oversight. As a result, plan sponsors will have to increase their involvement in their employees’ retirement savings behaviors.
The regulations, effective Jan. 1, 2009, require plan executives to provide a written plan document, account for excess contributions and monitor the transfer of assets among multiple plan service providers. The most significant change is that the historical view that 403(b) plans are “participant-driven plans” is gone and has been replaced with a new paradigm … in the IRS’ view; 403(b) plans are now “employer-sponsored plans.” As a result, plan sponsors will be held accountable by regulators for the administration, compliance, products and services and related costs, of their plans.
Nonprofit executives must adapt to being plan sponsors and rid themselves of the mindset of providing an “arms-length” service to their employees.
Some of the questions plan executives are beginning to ask include:
* Should we reduce the number of vendors and investments offered?
* What are the benefits (and costs) of auto enrollment?
* What are the fiduciary responsibilities?
* How should we educate plan participants?
One solution to this new paradigm is for a nonprofit retirement community to join a multiple employer pension plan (MEPP). (Note: MEPPs should not be confused with multi-employer retirement plans which are intended for collectively bargained groups.) The core attributes of a MEPP are similar to an organization where “membership has its privileges.” For example, participating organizations enjoy:
A single (outsourced) administrative platform:
• Recordkeeping of participant accounts
• Transaction processing
• Reporting and compliance (coverage testing)
Consolidated (and outsourced) compliance:
• One Form 5500
• One summary annual report
• One plan audit (saving each organization its own fee)
• Each plan has separate discrimination testing
Control … since each participating employer determines
• Eligibility rules
• Match and profit-sharing contribution rules
• Vesting rules
• Use of forfeitures
• Test failure correction
Best Practice rules of a MEPP require that each plan sponsor commit to:
• One fiduciary oversight committee for the entire plan
• One service provider
• One investment structure (which includes well diversified “best of breed” managers)
• Safe harbor plan design, and/or
• Auto enrollment (to raise participation to levels above 80%)
• Best Practices in plan administration (electronic processing of enrollments, deferral rate changes, remittance, etc.)
The advantage of the Multi-Employer Pension Plan (MEPP) business model is that every plan sponsor, regardless of size, receives the economy-of-scale benefit and buying power of a much larger organization. These benefits result in reduced administration and investment expenses, which are a major problem affecting thousands of tax-exempt entities. Through a MEPP, a retirement community with $1 million in plan assets can offer the same high quality administration and low cost investments as much larger plans (e.g. $50 million).
It isn’t surprising that smaller employers feel neglected, said Rick Meigs, founder of 401khelpcenter.com LLC in Portland, Oregon. “A lot of the major vendors don’t even come into that marketplace,” he said. “What that leaves is more expensive insurance products and a few niche players who are willing to get into that market.” Right now, it is simply too expensive for providers and financial advisers to spend a great deal of time servicing small companies, Meigs said.
The Chicago-based Spectrem Group recently issued a report, “Best Practices in Relationship Management,” that showed that while most plan sponsors are satisfied, a larger portion than in the past are less satisfied. The study was based on an online survey conducted of 150 plan sponsors of all sizes in April.
Sponsors of plans with assets of less than $10 million mentioned the need for their providers to be more responsive. It is common for smaller companies to feel slighted, said Gerald M. O’Connor, a director at Spectrum.
“Every plan sponsor would like to feel like they’re on the ‘very important customer’ list,” O’Connor said. “When you get to small companies, that’s very hard to do. The only way you can service small companies is to standardize a lot of things.”
Overall, 20% of sponsors said they were somewhat to very likely to switch plan providers over the coming year. This might explain the high interest level in participating in Multiple Employer Pension Plans.
Is your organization ready for the new requirements and new considerations for tax-exempt retirement plans? Now is the time to manage your fiduciary responsibilities!
William C. Fisher is the president of Arlington Heights, IL-based Investment Advisory Group LLC.