Nonprofit Workers Fall Short in Retirement Savings

Employees who work for charities, government agencies, and other tax-exempt organizations aren’t

coming close to saving as much money for retirement as their peers in the business world.

As a result, they run the risk of being unable to afford a comfortable retirement, according to a study by Fidelity Investments, in Boston.

Fidelity’s Tax-Exempt Workplace Savings Tracker found that workers at government and nonprofit groups have an average of $48,000 saved in deferred-compensation retirement investment plans offered by their employers. People who work for businesses, by comparison, have saved an average of $62,000 in such plans.

The difference is more profound in light of the fact that the workers surveyed have comparable income levels. The median annual income for the tax-exempt employees surveyed was $55,000. Corporate workers in the survey earned a median income of $58,000.

But beyond the mere disparity in savings levels is another troubling statistic: Nearly half of the tax-exempt workers surveyed — 48 percent — contribute less than $2,000 per year to their retirement plans.

That contribution is well short of what financial planners say is necessary to retire comfortably. A 2005 analysis by the financial-services company T. Rowe Price found that individuals should save at least 15 percent of their pretax salary to replace 50 percent or more of their current salary in retirement. Those who delay saving until later in their careers may need to save as much as 25 percent of their salaries.

A tax-exempt worker making $55,000 annually would have to contribute at least $8,250 per year into a retirement account to reach that 15-percent level.

Phasing Out Pensions

More than half of the government and nonprofit employees surveyed, 55 percent, say they have a pension plan, though 57 percent of those who have such plans worry that their pension benefits will be reduced or discontinued.

That fear is based largely on the fact that many for-profit companies and charities have been phasing out pension plans in recent years in favor of 401(k) and other retirement-savings vehicles.

Pension plans are employer-sponsored plans in which employees are guaranteed retirement income based on their tenure.

To save money, many employers are discontinuing their pension plans and replacing them with deferred-compensation programs, such as 401(k) plans, in which employees contribute a portion of their earnings to an investment account — contributions that are often matched by a contribution from their employer.

In a deferred-compensation plan, a worker’s retirement income stream depends largely on the amount of money he or she has saved in the account, and the onus is on the employee to make sure he or she saves enough.

Fidelity’s study found that 8 percent of the tax-exempt employees who don’t have a pension plan were once part of a plan that had been discontinued.

Despite this trend, however, only 38 percent of workers in the Fidelity study who are worried about their pensions say they are increasing their personal contributions to help bridge the gap.

“It’s encouraging that many tax-exempt-sector workers recognize that personal savings are playing a more-critical role in their retirement, but troubling that they have no plans to increase those savings,” says John Begley, executive vice president for Fidelity Employer Services.

Because of that inertia, Mr. Begley suggests that employers begin automatically enrolling their workers in deferred-compensation retirement plans and taking advantage of tax laws that allow them to have workers automatically increase their savings as they grow older.

Workers have the ability to opt out of such plans if they do not want to contribute money to their retirement accounts, though he says many workers would probably choose to take advantage of savings benefits if they were available automatically.

“The best thing the plan sponsors can do, rather than overwhelm people with education, is implement the automatic-enrollment and automatic-increase programs,” Mr. Begley says.

John E. Courtney, an associate professor of business at the University of Maryland and executive officer of the American Society of Nutrition, in Bethesda, Md., says nonprofit groups should also shorten the vesting periods for their retirement plans. Since workers tend to switch jobs more often early in their careers, longer vesting periods prevent many of those workers from saving money for retirement while they are younger. In turn, they are unable to build a strong base of savings.

“Eliminating cliff vesting and offering employees immediate vesting will help young staffers,” he says. “These staffers have a higher turnover rate and leave their positions after a few years and they may lose a portion or all of the company portion of their retirement plan.”