Charities: Retirement Plans and Giving Back

Austin is a fantastic city, as most everyone in the country has been learning over the last several years. Austin has been listed as a top retirement destination for active seniors and has been touted as a great home for young, single professionals. This diversity of appeal shows itself in other ways. In Austin, the long history of the Texas freedom-fighter, rancher, and cowboy has blended with the technology culture that has adopted Austin as its home. One cultural kudos that many Austinites wear like a badge of honor is their prominence in charitable giving. Austinites do tend to be very community oriented. This is the birthplace of prominent charitable organizations such as the Livestrong Foundation. According to the group GREENLIGHTS FOR NONPROFIT SUCCESS, Austin, in 2007, ranked 14th out of the top 50 US cities in charitable organizations per 1,000 residents. At its core, Austin seems to be a town that attempts to give back.

With all of these charitable organizations calling Austin home, there has been a big demand to attract good, long-term employees. Limited budgets and scarce resources lead nonprofits to have issues competing with profit driven companies in the area of compensation for talented workers. Obviously, many professionals that hear the calling to work in charitable institutions do not do so out of a desire for wealth; however, they do need to be compensated for their time, hard work, and education level. One way that nonprofits attempt to encourage talent to stay employed within their organizations is through their benefits plans. These benefits could be attractive health and dental plans, disability and life insurance, and retirement plans. Those charities that have chosen to offer nice retirement plan packages have taken on a very burdensome duty that has been exacerbated by recent legislation. Many do not realize what tasks they have accepted as a plan provider.

Fiduciary Duty in Developing Retirement Plans

The biggest task that any nonprofit is taking on when it decides to offer a retirement plan (typically called a 403(b) plan) to its employees is a thing called “fiduciary duty”. In accordance with IRS Regulations, plan sponsors must adopt a written 403(b) plan document. With this added level of involvement in plan design and administration, these employers in effect agree to serve their plans as ERISA (Employee Retirement Income Protection Act) fiduciaries.

403(b) plans are generally subject to ERISA if the plan is “established or maintained” by a tax-exempt organization on behalf of its employees. As provided under a regulatory safe harbor, a 403(b) plan will be not deemed to be established or maintained by the employer if (1) employee participation is completely voluntary, (2) all rights under the 403(b) plan’s annuity contracts or custodial accounts are enforceable solely by the employee, (3) the involvement of the employer is limited to publicizing the program without endorsement and to collecting contributions through payroll deductions, and (4) the employer receives no compensation, other than reasonable reimbursements for payroll deduction costs.

ERISA 403(b) plan sponsors and other fiduciaries are responsible for the management of the plan and its investments in accordance with the demanding standards of ERISA. There are four central duties which require fiduciaries to act: (1) for the exclusive purpose of providing benefits and paying reasonable plan expenses, (2) in accordance with the “duty of prudence,” (3) by diversifying plan investments so as to minimize the risk of large losses, and (4) in accordance with the plan’s documents. With ERISA 403(b) plans, the participants generally are left to control the allocation of their investments within the fund line-up, but the plan fiduciaries are responsible for those allocations if the plan has not satisfied these requirements. Once these conditions are satisfied, the plan fiduciary is responsible for the prudence and diversification within the plan’s investment menu, but is not responsible for the actual investment allocation of participants’ accounts.

In order to comply with these standards, plan sponsors may tend to appoint fiduciary committees to oversee the development of these fund line-ups. This committee should have a written charter to provide guidance on its composition and designated duties. Since the procedural aspects of the duty of prudence contemplate an objective process for selecting, monitoring, and changing the plan’s investment line-up, the DOL encourages the adoption of an investment policy statement (IPS) to assist the investment committee or other plan fiduciaries to discharge these duties solely in the interests of the participants and beneficiaries of the plan. To comply with the substantive aspects of this duty, which is sometimes called the “prudent expert” rule, plan sponsors should seek the assistance of a qualified adviser, such as a Registered Investment Adviser.

Too often, charitable organizations do not realize the depth and demand placed on them and their committee members when dealing with the fiduciary duties. There can be a lack of understanding that there is not only professional but also personal liability at stake in those duties. This lack of full understanding can lead to inappropriate decision making and a lack of proper participation by committee members and the overall organization.

Adherence to Guiding Principles in Developing Investment Selections

Another issue that has been developing around the growth of 403(b) retirement plans in the nonprofit arena is the lack of principled investment choices within the fund line-up of some plans. An example of this would be for a charity devoted to fighting cancer to offer a fund that invests heavily in Phillip Morris (Altria) stock. Another example would be an environmental group concerned with deforestation allowing a fund that invests heavily in commercial logging.

The converse of this would be for each plan to limit its choices to those that are “socially responsible”. The problem with this limitation is that it may not be seen to provide the appropriate amount of choice when viewed through the fiduciary lens. What may be the best answer is to provide socially responsible alternatives in the fund line-up. Again, the issue with that can be that not everyone agrees what constitutes a socially responsible investment. That is another area where an expert can help assist the plan fiduciaries in developing the appropriate criteria for its offerings.