In the social sector, employees dedicate their careers to advancing meaningful causes and supporting communities. However, while these mission-driven professionals work tirelessly to ensure the financial health of their organizations and the people they serve, their own financial wellness often takes a backseat. We delve into the unique financial challenges faced by nonprofit employees while exploring the often overlooked aspects of nonprofit financial wellness through an insightful Q&A with Bernstein Defined Contribution Strategist Chris Gouryh and Bernstein Wealth Advisor Jordan Forney.
Q. If you Google “nonprofit financial wellness,” you’ll find a laundry list of resources on nonprofit accounting, financial statements, and financial literacy programs for the public. Yet missing from this list are references to the financial wellness of nonprofit employees. Why is the financial wellness of nonprofit employees often overlooked?
Jordan Forney: It’s ironic, isn’t it? Nonprofit leaders are busy ensuring their organizations’ financial stability and even offering financial literacy programs to the community. But the employees who spend their lives working for mission-driven organizations often fall behind when it comes to providing for their own long-term financial well-being.
Q: Is the issue of financial wellness unique to nonprofit employees?
Chris Gouryh: Not at all. It’s no secret that many Americans are not prepared for retirement. But we’ve found that nonprofit employees may be even more challenged for several reasons. First of all, nonprofit employees tend to earn relatively low wages. Think about it—the average salary for a program coordinator is around $50,000, according to Payscale. That makes the deferral of any income in a retirement plan an immediate sacrifice.
Jordan Forney: In my experience working with nonprofits, many of them have lean management teams and volunteer boards. So, they have their hands full. They’re not only overseeing the retirement plan and trying to keep up with rules and regulations that are constantly changing, but their main focus is on advancing the organization’s mission.
Nonprofits also tend to experience high rates of turnover from what I’ve seen. That makes getting and keeping employees enrolled in retirement plans harder. It often turns into this self-reinforcing loop that becomes very costly for organizations. And generally speaking, nonprofit employees tend to have little exposure to investing. Unlike some other industries, there is little natural exposure to investing or financial planning concepts in the daily work of many nonprofit employees.
Q: In your experience, what is the net impact of these challenges on nonprofit employees’ retirement plans?
Jordan Forney: It all adds up. Given all of these challenges, it’s not surprising that the participation rate in retirement plans among nonprofit employees is typically pretty low.
Chris Gouryh: On top of that, there is a broadly low allocation to growth assets, which are critical to establishing a secure retirement. That’s why we generally advise nonprofit leaders to focus on what we like to call the “three D’s” to help their employees build and maintain a successful retirement plan. The organization responsible for the retirement plan—the plan sponsor—has three main tasks: define its role and responsibilities, perform due diligence, and demonstrate a process and procedure for operating the plan.
Q. Let’s walk through those one by one, starting with defining roles and responsibilities. What does that involve?
Chris Gouryh: Most nonprofits offer defined contribution 403(b) retirement plans, which are very similar to 401(k) plans. These fall under the Employee Retirement Income Security Act (ERISA), which is overseen by the Department of Labor. Part of the statute talks about the organization’s role as a plan sponsor—its fiduciary duty.
So, a plan sponsor’s representative becomes a fiduciary under ERISA in one of two ways. Either they take on a specific role or they do something that counts as a fiduciary action. The first one is easier to define—here, we’re talking about being the named fiduciary who manages the plan, a trustee, or an investment manager or advisor. Those are all specific roles that automatically make you a fiduciary.
On the flip side, actions that make someone a fiduciary are things like having discretionary authority over the plan’s administration or its assets. Basically, a fiduciary makes decisions for plan participants and has a legal duty to act in their best interest.
Q. What about nonprofit Boards…where does the Board fit in?
At nonprofits, fiduciary responsibility often rests with the Board, but it can delegate that responsibility to a committee within the Board or an external agent. Surprisingly, Bernstein has found that some Boards or committees are unaware of their fiduciary roles. In a proprietary survey we conducted several years ago, we asked plan sponsors if they considered themselves plan fiduciaries. Only 44% answered “yes,” while 49% responded “no,” and the rest didn’t know. In reality, 100% of the respondents were fiduciaries. That’s why nonprofit leaders should ask themselves, “Do we have the expertise and capacity to fulfill our fiduciary role?” If the answer is no, then it’s the duty of leadership to partner with an advisor or service provider.
Q. Let’s turn to the second “D” in your framework—due diligence. What does that entail?
Chris Gouryh: Whether you’re choosing a partner to serve in an administrative capacity or as an investment advisor, finding the appropriate one requires due diligence. Administrative duties include a range of tasks—from creating and filing the Form 5500 to fee disclosures.
Jordan Forney: And in my experience working with nonprofits, most organizations tend to outsource administrative functions—especially record keeping. Think of that as the plumbing of the operations, responsible for account balances, transactions, fee disclosures, and payroll, for example.
Q. What about monitoring the plan and its investment lineup? What are some of the due diligence considerations there?
Chris Gouryh: Lack of asset class diversification and investment conflict, worries about single manager concentration and cushioning investment loss, just to name a few. Look, many sponsors are stretched thin and overwhelmed. Partnering with a third-party investment manager or advisor in a co-fiduciary capacity requires continued oversight but significantly relieves the burden.
Beyond the investment lineup, due diligence of an investment partner should also include a review of their education strategy. What we’ve found is that…if employees are not getting one-on-one engagement, odds are they’re not doing what’s necessary—budgeting, financing a home, and satisfying daily spending—for financial wellness.
Jordan Forney: And if they’re not engaged fully, they may be at risk of leaving and finding a job that pays more money with a better benefit package because they don’t feel like their retirement is secure.
Q. Let’s round it out with your third “D”—demonstrating process and procedures. What does this cover?
Chris Gouryh: Fiduciaries need to establish and adhere to operating procedures for the investment and administration roles. This includes creating an investment policy statement with information like plan objectives, asset allocation, risk tolerance, and liquidity requirements. Also, administrative procedures for all transactions such as the transmission of employee contributions should be clearly communicated. Finally, a schedule for regular re-enrollment accompanied by advice on contribution levels and investment selection should also be spelled out.
Q. Any final thoughts?
Chris Gouryh: Unfortunately, there’s no ‘one size fits all’ to retirement planning, but the basics of the “three D’s” provide a framework for building a successful plan that is customized for each organization’s unique employee population.
Jordan Forney: If you ask any leader to name the organization’s most valuable asset, the most likely answer will be, “the people.” And at the end of the day, serving the employees who serve the organization achieves the ultimate goal—put the mission first, but focus on your people always.
- Christopher Gouryh
- Strategist—Defined Contribution