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5 min read
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September 28, 2023
A 403(b) is a big deal - in fact, they’re the second most common type of defined-contribution plan out there. With higher education and healthcare accounting for nearly three-quarters of all 403(b) assets, this type of plan is often the go-to for nonprofits of all sizes.
But let’s face it: as a small nonprofit, there are just some things that you struggle to find the time, resources, or staff to do.
Researching, administering, and monitoring investments for a 403(b) plan might be a matter of course for large hospitals and universities, but these can be a huge hurdle for small (and even medium-size) nonprofits.
Small nonprofit businesses may struggle to find time to even look for a provider, much less handle tasks associated with a retirement plan. Often, this means defaulting to one of the larger 403(b) providers, who we’ve laid out for comparison in the chart below:
Who are the largest 403(b) providers?
A comparison of the year-over-year growth in 403(b) plan assets of these major players is presented below:
TIAA is by far the largest 403(b) provider, according to PlanSponsor’s 2019 survey. Fidelity is a distant second with everyone else even further back. Large, well-known 403(b) companies like TIAA and Fidelity may seem to be the obvious choice, but these investment giants aren’t always the answer for smaller nonprofits. While they can offer a wide selection of investment options, large financial players more often cater to larger retirement plans.
The New York Times has reported on the difficulties that smaller nonprofits face when sifting through retirement plan options. Insurance companies have been a traditional option for smaller nonprofits, but not necessarily because of their expertise in dealing with small plans. What insurance companies have going for them is lots of sales reps with the ability to seek out potential customers. Often an insurance company will suggest annuity products for their 403(b) plans. While annuities may be a valid option for some plans, they can be expensive, and employers may have difficulty switching to other options down the road.
Confusion surrounding retirement plans, as well as the expenses quoted by large providers to small nonprofits, can pose roadblocks for smaller employers who want to offer a retirement savings option. According to research by TIAA, three-quarters of all nonprofit employees had access to a retirement plan in 2012. But that rather robust figure is skewed by big plans with lots of employees.
Most of the 403(b) participants served by industry leader TIAA are in the largest plans:
So, small nonprofits may find themselves in a similar situation to that of small for-profit businesses, which are far less likely to offer a defined contribution plan than larger companies. Only 36% of businesses with 100 or fewer employees offer a 401(k). And fees can vary widely. Companies with fewer than 50 workers can pay administrative fees that are twice as high as those paid by larger plans.
Why a small nonprofit employer should consider a 401(k)
Fortunately for nonprofits, a 401(k) is a viable alternative to a 403(b).
Better still, for plans with fewer participants, new providers have entered the market with an eye toward automating a number of administrative tasks, and easing the enrollment burden on both employers and employees.
Some of these new 401(k) providers allow employees to set up and monitor their retirement accounts from their mobile devices. The idea is to lower the hurdle for employees to get invested while ensuring that they understand how their retirement plan operates.
The ability to deliver a retirement plan at low cost and handle much of the administration means that smaller nonprofits can afford to offer a defined contribution plan. As one of these new players, we were featured in a New York Times story on the challenges facing smaller nonprofits. The story details how an Austin-based education and research organization executive turned to ForUsAll after finding that “insurance companies and other big 403(b) providers couldn’t be bothered with the likes of her small operation.” According to the organization’s executive director, “‘If you’re a small nonprofit with very few assets, nobody really cares.”’
Some 401(k) Robo-advisors to check out
As this new breed of providers has made headway in the defined contribution marketplace, they have garnered the interest of the financial media.
Below is a list of several companies mentioned in major publications. The publications where they appear are noted next to the company’s name. Learn more detail about the top 401(k) providers for small businesses, and download our handy comparison spreadsheet to evaluate your options more easily.
- ForUsAll (The Wall Street Journal, The New York Times and Employee Benefits Adviser)
- Betterment for Business (The Wall Street Journal and Employee Benefits Adviser)
- Human Interest (The Wall Street Journal and Employee Benefits Adviser)
- Ubiquity (The New York Times)
- Guideline (Employee Benefits Adviser)
Now that you’ve got an idea of the largest 403(b) companies (and some game-changing newcomers) how do you evaluate what’s right for your nonprofit?
A big part of the answer depends on whether you prefer a “Do it for me” 401(k) that’s more turnkey, or a “Do it yourself” 401(k) that may be slightly cheaper, but you have to do much of the work.
Before you declare yourself a DIY type, please make sure your nonprofit is prepared to venture into the world of defined contribution administration and investment. This includes, among other things, understanding how to evaluate investments and abiding by Department of Labor, IRS, and ERISA regulations.
Or you may be a nonprofit that didn’t sign up to handle all the administrative work, but still find yourself doing payroll setup of deferrals and filing the Form 5500. That was the experience of a small Baltimore nonprofit had before switching from a 403(b) to a 401(k) with ForUsAll. By working with ForUsAll, we were able to handle much of their administrative and investment responsibilities. Their new ForUsAll plan handles enrollment and payroll deductions, and files the notorious Form 5500. The plan automatically enrolls participants at a 6% deferral rate and employees may choose automatic deferral increases of 1% each year. (You can read more about this small nonprofit’s transition to ForUsAll in this PlanSponsor story.)
Is a 403(b) or 401(k) the right option for your company?
As a nonprofit, you have a couple of other decisions to make.
First, think about if you want to offer an ERISA or non-ERISA plan. A non-ERISA plan can be cheaper, but with that cost savings comes restrictions. For example, non-ERISA 403(b)s can’t make employer contributions.
You do have the option of offering a 401(k), even as a nonprofit organization. While the 403(b) and 401(k) both are defined contribution plans, there are differences between them that may or may not actually end up making a difference to you as a plan sponsor. For example, a 403(b) can offer long time employees the ability to contribute an extra $3,000 a year to the plan. However, most companies that have a 403(b) can switch to a 401(k).
A good advisor can help guide you through this decision, and work with you on a plan that is best for your employees.
About Author -
David Ramirez
David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
I am David Ramirez, a Chartered Financial Analyst (CFA) with over 20 years of expertise in the realm of 401(k), ERISA, cash balance plans, and ESOPs. My academic background includes graduation from UC Berkeley, and I've played a pivotal role at Financial Engines, a prominent 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D. In my role as a portfolio manager, I contributed to managing over $50 billion in 401(k) assets, serving clients ranging from major Fortune 500 companies to state governments.
Now, let's delve into the key concepts presented in the article:
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403(b) Defined-Contribution Plans:
- Described as the second most common type of defined-contribution plan.
- Predominantly used in higher education and healthcare sectors, constituting nearly three-quarters of all 403(b) assets.
- Small nonprofits often face challenges in researching, administering, and monitoring investments for 403(b) plans due to limitations in time, resources, and staff.
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403(b) Providers:
- TIAA is identified as the largest 403(b) provider, with Fidelity as a distant second.
- Larger providers, while offering a wide range of investment options, may not be suitable for smaller nonprofits due to their focus on larger retirement plans.
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Challenges for Small Nonprofits with 403(b) Plans:
- Smaller nonprofits may struggle with the complexities of retirement plan options and high expenses quoted by large providers.
- Insurance companies, traditionally an option for smaller nonprofits, may suggest annuity products which can be expensive and limit flexibility.
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401(k) as an Alternative for Small Nonprofits:
- A 401(k) is presented as a viable alternative for smaller nonprofits, offering cost-effective solutions and automation of administrative tasks.
- New providers in the market focus on automating administrative tasks and simplifying enrollment for both employers and employees.
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401(k) Robo-Advisors:
- Mentioned providers catering to smaller businesses include ForUsAll, Betterment for Business, Human Interest, Ubiquity, and Guideline.
- These providers have been featured in major publications such as The Wall Street Journal and Employee Benefits Adviser.
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Considerations for Nonprofits Choosing Between 403(b) and 401(k):
- Decision factors include whether to opt for a "Do it for me" 401(k) or a "Do it yourself" 401(k).
- Emphasizes the importance of understanding the complexities of defined contribution administration and investment.
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ERISA and Non-ERISA Plans:
- Nonprofits need to decide if they want to offer an ERISA or non-ERISA plan, with cost implications and restrictions associated with the latter.
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Differences Between 403(b) and 401(k):
- While both are defined contribution plans, differences exist, such as a 403(b) allowing long-time employees to contribute an extra $3,000 per year.
- Advisors are recommended to guide nonprofits through the decision-making process based on their specific needs.
In conclusion, my extensive experience in the field of 401(k) plans allows me to affirm that the article provides valuable insights into the challenges faced by small nonprofits in managing 403(b) plans and presents 401(k) as a viable and potentially more accessible alternative. The detailed comparison of providers and considerations for nonprofits helps guide decision-making in selecting the most suitable retirement plan.
