Of Mutual Benefit

Art by Katherine Streeter

For advisers seeking new prospects, a developing corner of the institutional retirement plan consulting space is nonprofits, says Michael Flahaven, a senior vice president for Hub International Ltd. in the firm’s Midwest financial services practice. Hub’s retirement plan services team already has clients in the nonprofit sector, he says, and the company sees this as one of many areas with significant growth potential. 

Flahaven says 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,” he notes. “The exceptions are governmental plans and plans offered by religious entities such as churches, synagogues or mosques.” 

He 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 be less potential fiduciary liability to address, but participant outcomes will 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. 

Next, seek to ensure that adequate fiduciary liability insurance policies have been established, assuming the plan sponsor is covered by ERISA. 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 does not 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.  

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 may 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.”