Client Service August 23, 2022

How Advisers Can Help Smaller Nonprofits

While serving the nonprofit market is comparable to serving small businesses, the market also comes with its unique set of challenges and opportunities.
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Art by Katherine Streeter


Michael Flahaven is a senior vice president for Hub International in the firm’s Midwest financial services practice.

Flahaven joined Hub in 2019 from the Standard, where he focused on middle-market corporate retirement plans. In his current role, Flahaven also manages the region’s retirement services team, coordinating their day-to-day responsibilities and encouraging their professional growth in the institutional consulting space. 

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One area Flahaven has been focused on recently is the nonprofit marketplace, which he sees as an exciting developing corner of the institutional retirement plan consulting space. As he tells PLANADVISER, Hub’s retirement plan services team already has a number of clients in the nonprofit sector, and the company sees this as one of many areas with significant growth potential.

“The first thing to say about the nonprofit marketplace is that it has advanced by leaps and bounds in terms of catching up with the 401(k) space and all the best practices that have been implemented there,” Flahaven says. “For example, we have moved away from the days where every 403(b)-style plan was set up around purely individual annuity contracts with anywhere from 15 to 20 vendors being involved. Having said that, the nonprofit side is still playing catch up in a number of ways, and there is a lot of work that skilled institutional advisers can do to support these plan sponsors.”

Based on Flahaven’s experience, nonprofit employers, like their for-profit counterparts, understand he importance of having solid retirement benefits at a time when it is more difficult than ever to recruit and retain talent. In fact, as Flahaven sees it, there is even more pressure on nonprofits to deliver strong benefits, because their pay levels often lag those of for-profit employers. Anecdotally, Flahaven says, it seems like nonprofit workforces experience higher turnover, perhaps due to less competitive pay and more challenging work conditions that can burn people out.

“When you serve small and even larger nonprofit plan committees, you may notice that there is a lot of turnover in the key management positions,” Flahaven observes. “As you are working on improving plans over time, the turnover can be a bit frustrating. The best way to address this, like with a 401(k) plan, is to install a very solid process that does not depend on a single key manager or leader.”

As Flahaven covered in a recent blog post, ensuring that nonprofit plan sponsors understand their requirements and responsibilities under the Employee Retirement Income Security Act is critical.

“Generally, all employer-sponsored retirement plans, whether they’re nonprofit 403(b)s, for-profit 401(k)s, pensions, deferred compensation plans or profit-sharing plans, are covered under ERISA,” Flahaven points out. “The exceptions are governmental plans and plans offered by religious entities such as churches, synagogues or mosques.”

Flahaven says it is important for advisers serving the latter group of non-ERISA plans to help them see the importance of establishing a prudent and effective plan management process. There may not be the same degree of potential fiduciary liability to address, but participant outcomes are going to be better if the plan is operated in an efficient, transparent and dependable manner.

According to Flahaven, there are a few actions advisers can take to help protect nonprofit organizations as fiduciaries. First is the provision of regular fiduciary training to the named fiduciaries and to any functional fiduciaries, such as the members of the retirement plan committee, should one be in place.

“This will inform these parties of their fiduciary responsibilities, best practices and the consequences and risks of not meeting fiduciary standards,” he says.

Next, seek to ensure that adequate fiduciary liability insurance policies are in place, assuming the plan sponsor is covered by ERISA.

“Fiduciary liability insurance is advisable for individuals who could be found responsible for fiduciary breaches,” Flahaven says. “It can help protect fiduciaries against claims of mismanaging plan assets or bad investment decisions and negligence in handling plan records or selecting plan service providers. The rise in frequency of fiduciary litigation makes coverage critical as a backstop.”

Flahaven says advisers entering this space should be very clear on when and how ERISA applies in the operation of retirement plans by nonprofits. It doesn’t happen often, he says, but it is not unheard of to come across a potential nonprofit client that mistakenly believes its plan is exempt from ERISA. 

“Not every nonprofit needs to follow ERISA guidelines and some may prefer not to,” he observes. “As noted, governmental plans—those sponsored by a state, county or municipality or one of their agencies or schools—are exempt, as are those sponsored by religious organizations. Other nongovernmental 403(b) plans may also be exempt from ERISA, but only if plan participation is voluntary and employer involvement is limited to the bare minimums of plan administration.”

Despite the benefits of following ERISA best practices, Flahaven says, there are also advantages to being a non-ERISA plan. A non-ERISA nonprofit does not have to provide a summary plan description and quarterly and annual investment information to plan participants, for example. Nor do non-ERISA plans need to file a Form 5500 or related schedules.

“Since 403(b) plans are subject to universal availability requirements that mandate all employees are immediately eligible to participate—with a few minor exceptions—the plan does not have to conduct actual deferral percentage testing,” Flahaven adds. “As a result, highly compensated employees can save as much as they want up to the legal limit without concerns for what non-HCEs save. This is also true for ERISA 403(b) plans.”

Compliance August 18, 2022

7th Circuit Issues Key Stock Drop Decision in Boeing Max Case

One expert attorney says the decision has particular importance to plan sponsors and fiduciaries who have employer stock as an investment.
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The 7th U.S. Circuit Court of Appeals in Chicago on August 1 upheld a lower court’s dismissal of a case brought against Boeing in 2019 over the drop in Boeing’s stock price.

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The appeals court found that the Boeing defendants weren’t fiduciaries under the Employee Retirement Income Security Act because an independent firm managed the company stock fund in the Boeing Co. Voluntary Investment Plan. The independent fiduciary in this case, Newport Trust Co., had managed the employee stock ownership plan since 2007 and was not the subject of litigation.

“This decision has particular importance to plan sponsors and fiduciaries who have employer stock as an investment,” says Allison Itami, partner and co-chair of the plan sponsor group at Groom Law Group. “It definitely supports the decision to use an independent fiduciary when there might be conflicts of interest about inside information.”

The three-judge panel wrote that Boeing had clearly delegated to Newport decisions about the ESOP, including whether to allow the plan and employees to continue to hold employer stock, and the decision to allow employees to continue making new investments in employer stock.

In making those decisions, the court ruled, Newport was not a Boeing insider and not privy to inside information related to the two major crashes of Boeing 737 MAX series airplanes.

“[Newport] was making decisions like any outside investor, albeit one holding a massive, $11 billion stake in the company, on the basis of public information about the company and its prospects,” the judges wrote.

Alleged Fiduciary Breach

The plaintiffs had sued Boeing, it’s investment committee, and some executives, arguing that Boeing’s leadership had known about the potential issues with the airplanes since 2010 and should have foreseen and addressed how those crashes would have led to the drop in Boeing’s stock price. The plaintiffs argued that the continued provision of employer stock during the period represented an ongoing fiduciary breach since the defendants should have taken action to protect plan participants’ balances.

Boeing’s share price tanked by more than $65 per share when Boeing’s planes were grounded, falling from $442.54 to $375.21 over four days in 2019.

The judges in the most-recent ruling wrote that by delegating investment decisions in the ESOP to an independent fiduciary, “neither Boeing, nor the other defendants, acted in an ERISA fiduciary capacity in connection with the continued investments.”

The judges recognize that Boeing delegated its fiduciary duty to to eliminate claims about Boeing insiders’ conflict of interest.

“We see no legal barrier to such a delegation, and decades of ESOP stock-drop litigation have provided powerful reasons for employers and fiduciaries for ESOPs to take this step,” they write.

If the investment committee had not appointed an independent fiduciary, the judges write, they may have also been open to a lawsuit claiming that they had breached fiduciary duty.

‘A Valuable and Legitimate Purpose’

“Independent fiduciaries like Newport can serve a valuable and legitimate purpose in managing the tension between ERISA and federal securities laws,” the ruling finds. “As plaintiffs’ arguments and defendants counter-arguments in this case show, the ‘right’ choice is fraught with the potential to make several ‘wrong ones.’”

The ruling reiterates the role that a third-party fiduciary can play for plan sponsors with an ESOP, Itami says.

“The fact that there are so many stock-drop complaints has made some plan sponsors wary of offering employee stock, and this decision really follows what other courts are saying, too, which is that the use of an independent fiduciary can reduce those particular risks,” she adds. “The more courts that make similar decisions saying that outsourcing to an independent fiduciary cures some of the thorniest conflicts, the more comfortable plan sponsors can be in offering employer stocks.”

The Boeing decision is the latest stock-drop suit in which courts have sided with plan sponsors following the landmark 2014 decision in Fifth-Third v. Dudenhoeffer. That decision established that plaintiffs would have to offer an alternative course of action that the fiduciaries could have taken to improve the outcome without breaking securities laws.

Since that ruling, the plaintiffs in very few stock-drop cases have been granted standing by judges. The lower court dismissed the Boeing suit in November, but the plaintiffs had filed an appeal.

Inside Information

“Under Dudenhoeffer, you’re not under a responsibility to utilize inside information as you manage the plan,” says Andrew Oringer, a partner in Dechert’s ERISA and executive compensation group. “One of the things that Boeing shows is that on the inside information point, the presence of a fiduciary might be concretely very helpful.”

That said, Oringer says that the Boeing ruling doesn’t mean that every plan sponsor with an ESOP should automatically run out to hire a third-party fiduciary.

“I think it’s a legitimate question after Boeing and in light of Dudenhoefer, as to whether or not you really need that independent fiduciary,” Oringer says. “It is helpful, and it provides some insulation. But everything that is helpful and provides insulation is not necessarily the thing to do.”

Plan sponsors should consider their potential risk and weigh the cost associated with bringing on the independent fiduciary.

“It’s a cost-benefit analysis,” Oringer says. “In general terms, I think having an ESOP is a manageable risk if you’re doing things right, observing proper procedures, and doing what’s best for your plan population and employees.”

Oringer says that unless a company believe that it’s particularly vulnerable to securities fraud, there’s little reason to eliminate an ESOP plan, a route that some had been considering.

“I don’t know that this ruling is necessarily breaking brand new ground,” he says. “But there’s nothing wrong with a little comfort either.”

Itami says that plan sponsors might consider reading the ruling to see how the judges understand the fiduciary duties of a plan sponsor.

“It has some good reading beyond just the employer stock,” Itami says. “It’s also helpful for plan sponsors to understand the very basic fiduciary functions.”

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