Like their counterparts in the for-profit sector, employees of nonprofit organizations are concerned about their financial futures.
A survey of nonprofit employees by Independent Sector and the TIAA-CREF Institute found that some 45% of employees were worried about their ability to plan for a financially secure retirement. Almost half had considered leaving the nonprofit sector for better paying jobs elsewhere.*
The issue of retirement planning can also play a role in an organization’s ability to attract talented workers. According to the Plan Sponsor Council of America, many nonprofits rely on their retirement plans to compete for top employees.
Clearly, an employer-sponsored retirement plan is a valuable recruiting and retention tool. Below is an overview of some recent trends in the retirement industry that may be of interest to nonprofit organizations that are considering starting a plan or enhancing their existing plans.
Automatic Features
Several years ago, two automatic plan features (auto enroll and auto escalation) were introduced to promote savings. Almost half of 403(b) plan sponsors agree that the automatic enrollment feature is a way to improve retirement outcomes.** The automatic contribution escalation feature also encourages greater savings. With either feature, employees may opt out or specify a different contribution amount.
New default investment options were also introduced that plans can use when participants neglect to provide investment instructions. Until that time, it was not uncommon for plans to have conservative stable value or money market funds as their default investments. Ideally, the new qualified default investment alternatives (QDIAs), which include lifecycle, target date, and balanced funds, will provide better long-term outcomes.
Retirement Income
One of the big concerns among retirees who don’t have a traditional pension is that they will outlive their retirement savings. The push is on to find ways for participants in defined contribution plans to turn all or part of their retirement savings into a stream of income when they retire.
Last year, the IRS issued tax regulations that clear the way for “qualified longevity annuity contracts” (QLACs) to be purchased through 401(k) and other qualified defined contribution plans, 403(b) plans, and governmental 457(b) plans, as well as traditional individual retirement accounts.
A QLAC begins payout at an advanced age (no later than 85). Participants may use up to 25% of their account balances or (if less) $125,000 to purchase a QLAC.
Before annuitization, the value of the QLAC is excluded from the participant’s account balance used to determine annual required minimum distributions (RMDs). Note that plan sponsors are not required to offer a QLAC.
The IRS has also issued a notice permitting qualified defined contribution plans to provide lifetime income by offering a series of target date funds that include deferred annuities among their assets, even if some of the target date funds in the series are available only to older participants. Certain conditions must be satisfied.
* Financial Security and Careers in the Nonprofit and Philanthropic Sector, TIAA-CREF Institute and Independent Sector, 2012
** 2014 403(b) Plan Survey, Plan Sponsor Council of America and The Principal Financial Group