May 01, 2003

How Small Charities Provide Retirement Benefits to Their Workers


By Maura Webber

After 14 years of doing without a pension plan, TreeUtah's staff members will finally begin saving for their retirement later

this year with the help of their employer.

Meryl Redisch, executive director of the Salt Lake City environmental group, decided to offer a retirement plan to employees after recognizing that one of her most loyal and talented staff members was in his 50s. "This is his life's work, and I felt that this is a way that we as an organization can give back," she says. "I want my staff to know that I'm thinking about them."

Not only was it the right thing to do for the group's longtime workers, Ms. Redisch says, but she also hopes the retirement plan will help TreeUtah by encouraging other good employees to stay on for the long term.

The plan, a 403(b), will allow workers to save tax-deferred money from their salaries. For now, the organization, with five employees and an annual budget of about $500,000, will pay an annual fee of less than $100 to cover the plan's administration through an outside financial-services company. If TreeUtah's finances improve in the future, Ms. Redisch says the group might consider making contributions into each employee's account.

At a time when the budgets of small nonprofit groups in particular are being squeezed by the weakened economy, TreeUtah's push to provide retirement benefits is somewhat unusual. Many smaller organizations don't even have the staff to determine whether adding the benefit is financially feasible. "I don't think there's anybody who says, 'I don't need it.' But small groups tend not to have the time to research it," says Marcia Brown, director of programs for the Nonprofit Coordinating Committee of New York, an umbrella organization in New York City that offers its nonprofit members a group retirement plan.

A 2002 benefits survey by the Society for Human Resource Management, in Alexandria, Va., found that the percentage of organizations that offer retirement benefits rises in proportion to the group's size. About 71 percent of nonprofit organizations with fewer than 100 staff members offered defined-contribution plans, while 80 percent of nonprofit groups with 500 or more employees offered similar plans. (Defined-contribution plans, the most popular type of retirement programs, receive contributions from either employees or their employer, or both.)

A survey in 2001 by the Nonprofit Coordinating Committee of New York found an even wider disparity in the offerings between large and small organizations. The study showed that retirement plans were offered by 63 percent of groups with 10 or fewer employees but by 98 percent of organizations with more than 100 employees, says Ms. Brown.

However, say charity leaders and benefits experts, retirement plans are equally important whether an organization is small or large. In part, they say, it's a matter of social justice: No worker can rely solely on Social Security, and those who have dedicated their lives to the nonprofit world deserve some financial stability in their old age. But also, say advocates of retirement plans, offering these benefits helps keep employee morale high and turnover low.

Changes in federal regulations over the past few years have simplified retirement options, making them more attractive to employees. And as government officials and the financial industry have emphasized the importance of retirement planning, an increasing number of workers have come to view such plans as necessities rather than perks. "I don't think people now consider retirement plans a luxury," says Ms. Brown. "Most people understand how important it is."

Many pension-plan advocates have worked in recent years to overcome concerns that all retirement plans require unwieldy paperwork or are costly to employers. Several years ago, Karen Ferguson, director of the Pension Rights Center, in Washington, sponsored some lunchtime seminars on retirement options for nonprofit advocacy groups and says all of the groups that attended subsequently set up plans for their workers. "A large part of the education process is people didn't realize how important it is," Ms. Ferguson says. "They didn't know how little Social Security provided and that there were inexpensive, easy plans that they could adopt that also didn't lock them in."

Weighing the Options

As they have in the for-profit world, defined-contribution plans have grown in popularity among nonprofit employers and employees. The plans are prized by the increasingly mobile work force for their portability and because they pose less long-term financial risk to employers.

Last year's benefits survey by the Society for Human Resource Management found that 68 percent of nonprofit groups surveyed offered defined-contribution plans, while only 31 percent offered defined-benefit plans, the more traditional pensions that are accumulated through employer contributions and provide workers with a guaranteed benefit upon retirement.

Smaller nonprofit organizations would do best to stick with defined-contribution plans, to avoid more complex planning and record-keeping requirements, says Michael Gordon, a lawyer in Washington who specializes in employee benefits. That, he says, still leaves groups with several alternatives. (For a full explanation of the choices, see the Philanthropy Careers story "A Guide to Retirement-Plan Options for Nonprofit Employers.")

Although 403(b) defined-contribution plans were for years the only option available to charity employers and remain the most popular with nonprofit organizations, 401(k)s have also been available to nonprofit employees since the passage of a federal law in 1986. With both plans, contributions are not subject to federal income tax until they are withdrawn. One of the key differences between the plans is the degree of employer involvement. In most cases, 403(b) plans only require employers to make payroll deductions, while 401(k)s require employers to set up and administer the plans.

While some might balk at the 401(k) regulations, David L. Wray, president of the Profit Sharing/401(k) Council of America, in Chicago, and author of Take Control With Your 401(k) (Dearborn Trade Publishing, 2002, $18.95), believes the rules make for a better program. "We think if you're going to have high employee participation in a plan," he says, "employers need to have an ownership interest."

Seeking Assistance

Financial-services companies, insurance carriers, and lawyers who specialize in retirement issues can offer assistance to charities in sorting through the alphabet soup of options. But even before seeking out potential providers, benefits experts say smaller organizations should first realistically assess their financial capabilities.

Among the main decisions employers must make is whether they will match employee contributions. Mr. Gordon cautions small charities not to make promises they can't keep. "Once the decision to protect the work force is made, then you can make a decision as to what's affordable and what's going to keep people around," he says. "If the organization is not that secure, installing anything other than a bare-bones pension plan is misguided."

Researching the different offerings is the next step. In many cases, providers have standardized their plans to keep costs down for smaller organizations. But fees, investment options, administrative assistance offered, and opportunities for ongoing employee education all vary from one provider to the next.

For example, TIAA-CREF, a nonprofit organization that sets up pension plans, is focused on keeping fees low for its mostly nonprofit customers. TIAA-CREF does not charge employers for creating its plans, but covers its subsequent costs by charging an annual fee that is usually less than half a percent of the assets held in each participant's account, says Richard Hiller, the organization's Western division vice president. By contrast, Mutual of America, which provides retirement and insurance coverage to nonprofit clients of all sizes, also demands no set-up cost for its pension plans, but generally charges employers a flat fee of $100 monthly for maintenance no matter how many employees participate and also deducts a small fee from each participant's account, according to William Conway, Mutual's executive vice president of marketing and corporate communications.

Group Benefits

Another approach that small organizations sometimes take is to band together to cut costs and share the administrative responsibilities of offering pension plans. Besides the Nonprofit Coordinating Committee of New York, umbrella associations such as the National Organizers Alliance, in Washington, and regional United Ways offer such plans to their members.

Chicago's United Way administers a defined benefit plan in which 13 separate charities, including Lutheran Social Services and the Illinois Society for the Prevention of Blindness, participate.

"It was an offering of support in recognition of the fact that most small agencies didn't have the capacity to do it on their own," says Richard Sewell, senior vice president of United Way in Chicago. Similarly, the Nonprofit Coordinating Committee of New York offers its members the opportunity to join a 403(b) plan, Ms. Brown says. As of September, about 5,640 employees from 249 nonprofit groups had assets invested in the plan, Ms. Brown says.

Such coalitions aren't easy to organize but supporters say they're worth the effort. The National Organizers Alliance, a nonprofit group that represents employees of social-justice organizations, set up a coalition to implement a retirement program in 1992. The plan accepted its first contribution in 1997 and today has about 81 groups enrolled. The total assets of the program's 600 individual accounts are valued at $2.7-million, says Lisa Weiner-Mahfuz, the alliance's pension-plan organizer.

Though the costs are shared, they remain the pension's chief barrier to attracting more members, says Mark Toney, executive director of the Center for Third World Organizing, in Oakland, Calif., and a pension trustee with the alliance. The group charges employers a $300 one-time start-up fee, a $25 fee per employee each year, and requires membership in the alliance itself. In addition, employers must contribute a minimum of 5 percent of their employees' gross salaries to the accounts. For now, the pension costs are partially subsidized through the alliance's annual fund raising. By attracting more members, the group hopes that within three years, it will no longer need to supplement the program with additional fund raising, Mr. Toney says. To date, the organization hasn't considered scaling back the required employer contribution.

"Our decision to have the mandatory employer contribution partly has to do with the principle of really trying to influence the social-justice culture," says Mr. Toney. "People that most need pensions are those that are the least able to pay for it out of their own paycheck."

Initially, the mandatory employer contribution caused Linda Stout, director of Spirit in Action, a social-justice group in Belchertown, Mass., to question whether she should join the alliance's pension plan. Ms. Stout ultimately decided that it was her responsibility to make sure that she could afford the $6,000 out of her annual budget of about $400,000. Ms. Stout, who liked the plan's simplicity, says Spirit in Action will officially join the plan this month.

As executive directors like Ms. Stout and Ms. Redisch of TreeUtah take the plunge to add retirement benefits, advocates are hopeful that the plans will become a given at even the smallest charities. Says Mr. Toney: "We're trying to make pensions an industry standard."

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