Nonprofit Groups Face New Rules on Providing Retirement Benefits

The Internal Revenue Service has approved big changes in the rules that govern 403(b) retirement plans — a move experts say will soon mean more paperwork for many nonprofit organizations and clearer options for many employees who invest in the plans.

The overhaul eliminates previous rules that had been in effect since the 1960s and makes 403(b) plans look more like corporate 401(k) accounts, which allow workers to shelter their earnings from taxes until the cash is withdrawn for retirement.

The rules will take effect, in most cases, on January 1, 2009.

The 403(b) plans are typically offered by public-school districts and colleges as well as other nonprofit organizations. They have become a popular investment option for many workers, accumulating roughly $546-billion in assets by the end of 2006, according to a survey by Pension & Investments magazine.

Despite those numbers, many financial experts say 403(b) plans have fallen short as an effective mechanism for helping workers save money for retirement.

Part of the reason is that, under the rules now in effect, employers who offer 403(b) plans do not have to provide written documentation that outlines how the plans work or spells out the employers’ responsibilities for managing the plans, says Phil Fogli, an adviser at PACS Consulting, a Philadelphia firm that specializes in financial planning.

As a result, many employees had been unsure about how plans were structured, what fees they were paying, or where they could go to learn about their options.

‘Value for Your Money’

The new IRS rules require that all 403(b) plans have a written document that acts as a “central locus” for employers and employees.

“That is the main message of the new law, which is you need to centralize the plan,” Mr. Fogli says. “You need to analyze the plan. You need to look at the fees. You need to look at the education. The regulation is geared toward looking at these issues and trying to get a service provider in there that is going to give you value for your money.”

Because organizations have not been required to perform such analyses in the past, Mr. Fogli says, many nonprofit groups are still offering their workers old-style annuity plans through insurance contracts.

Such plans are often difficult for workers to understand and carry higher fees than mutual funds, which are a popular option among those who invest in 401(k) accounts.

Other nonprofit organizations with 403(b) plans offer their employees an array of investment options — but no road map for deciphering which options fit their needs, says John Begley, an executive vice president of Fidelity Employer Services, in Boston, which sells and manages employee retirement plans.

With the new rules, Mr. Begley says he expects many employers that offer 403(b) plans to trim the number of choices employees must make when they enroll in the programs.

“If there is too much choice, at times that inertia is difficult to overcome,” Mr. Begley says. “I’m hopeful that having fewer alternatives will enable them to have an easier choice to make.”

Aiding Workers

The new law is designed, in part, to help workers invest more money for retirement, a sentiment that is welcomed by financial planners who worry that workers in the nonprofit world are not keeping up with their peers in other industries.

A survey this winter by Fidelity Investments found that workers at government and nonprofit groups have an average of $48,000 saved in “employer-sponsored, defined-compensation” retirement plans, such as 403(b) plans.

People who work for businesses and earn a comparable income, by comparison, have saved an average of $62,000 in such plans. The survey also found that nearly half of tax-exempt workers — 48 percent — contribute less than $2,000 per year to their retirement plans.

“With the new regulations, simplifying it is going to lead to more education,” says Kelly O’Donnell, a manager at LarsonAllen, a Minneapolis accounting and financial-services company that manages 403(b) accounts for nonprofit clients. “People will hopefully be able to understand it more and hopefully put more money away.”

But while the rules are expected to help employees, there are concerns that the requirements will lead to higher costs for the nonprofit groups that offer the plans, especially since they will have to spend time creating written plans and more closely monitoring the results, says Cindy Bertrand, a director of CBIZ Accounting, Tax & Advisory Services and the former chief financial officer at the Jewish Community Foundation of San Diego.

For larger nonprofit groups, those concerns are relatively minor, since they are more likely to already have written plans and streamlined options for employees. But Ms. Bertrand says she worries that some small organizations might not be able to handle the added administrative costs.

Some financial experts say the new rules might also push managers of smaller 403(b) plans out of the market, since nonprofit groups are likely to consolidate the number of investment options they offer and choose big-name mutual-fund plans with lower fees.

That shakeout could be accelerated if the federal government requires those that operate 403(b) plans to submit regular audits of the plans’ finances.

Ms. Bertrand says such audits have long been required for corporate 401(k) plans but are not required for 403(b) plans, even with the new regulations.

That distinction is likely to disappear soon, Mr. Fogli says. Audit requirements could lead to a further spike in costs for nonprofit organizations and plan managers.

But even if that happens, he says, he expects most nonprofit groups that offer the plans to be able to handle the impact of tighter accounting rules.

“The products tend to follow the regulations,” he says. “There may be a simple solution that’s cost effective and works for people.”

The new regulations for 403(b) retirement savings plans are available online.