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Four Retirement Plans for Nonprofits: The Pros & Cons

Posted by Concannon Miller on Tue, Jan 4, 2022

Four Retirement Plans for Nonprofits: The Pros & Cons

However, nonprofits now have other options as well. Even if you continue to prefer a 403(b) plan, as many nonprofits still do, it pays to review and weigh the benefits of other types of accounts.

Nonprofits generally may choose from the following four plans:

403(b): The 403(b) plan is comparable to the better-known 401(k) plan. Contributions are made on a pretax basis through paycheck deductions. They can grow and compound tax-free until the account holder makes withdrawals. Distributions taken by participants age 59½ and older typically are taxed at ordinary income rates. Your organization may also choose to offer employees a Roth-type 403(b) plan. With these plans, contributions are taxable, but distributions are tax-free.

For 2022, the individual limit on 403(b) contributions is $20,500 ($27,000 for those age 50 or older). Furthermore, staffers who have worked for your organization for at least 15 years can contribute an additional $3,000 a year for five years if they've contributed an average of less than $5,000 per year previously. This specific "catch-up" contribution is unique to 403(b) plans.

Your nonprofit can also make contributions to 403(b) accounts. Loans and hardship distributions may be possible if certain requirements are met.

401(k): This for-profit standard can also be used by not-for-profit organizations. As with 403(b) plans, participants may contribute up to $20,500 ($27,000 for those age 50 or older) in 2022. Participant accounts may also receive matching contributions from employers up to a certain percentage of compensation.

As with 403(b) plans, 401(k) contributions can grow tax-deferred until they are withdrawn. Distributions by participants age 59½ and older are taxed at ordinary income rates. And a 401(k) plan can be set up as a Roth-type account that accepts after-tax dollars but provides tax-free withdrawals. Loans and hardship distributions may be permitted if certain requirements are met.

READ MORE: Nonprofit Success in 2022: 7 Strategies to Consider

Savings Incentive Match Plan for Employees (SIMPLE): As the name implies, SIMPLE plans are easy to administer and exempt from many of the strict testing and reporting requirements that apply to 401(k) and 403(b) plans. However, SIMPLEs rely on a relatively rigid structure. For example, these plans don't permit loans or hardship distributions. Nor can SIMPLE plans be set up as Roth-type accounts.

For 2022, SIMPLE plan participants can contribute up to $14,000 ($17,000 for those age 50 or older). A 10% early withdrawal penalty applies to most qualified plan distributions (for example, from 403(b) and 401(k) accounts) made before age 59½, unless a special exception applies. However, the penalty is 25% for early distributions from a SIMPLE plan if it's taken within two years of establishing the account.

Payroll Deduction IRAs: These are even simpler than SIMPLEs. Employees establish IRAs for themselves, and your organization makes contributions on their behalf with payroll deductions. Of course, employees could set up their own automatic investment plan for an IRA. But by formalizing the process, you encourage staffers who might not otherwise save for retirement to start and maintain a good saving habit.

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Compare Pros and Cons

Other options used in the for-profit sector, such as defined benefit plans, are available to nonprofits. However, they're not common. And, in fact, most nonprofits choose 403(b) plans. The following advantages weigh in their favor:

No ERISA requirements: Like government agencies and school systems, most nonprofits don't have to follow Employee Retirement Income Security Act (ERISA) rules, so administration tends to be less burdensome. For example, administrators of most 403(b) plans aren't required to perform annual nondiscrimination testing. This can also benefit highly compensated employees.

Note: Even nonprofits that don't automatically qualify for non-ERISA status may be able to avoid ERISA rules if they don't provide employer contributions and have only "limited involvement" in the plan.

READ MORE: Time to Make a Change? 6 Steps to Streamline An Auditor Transition

Additional catch-up provision: The $3,000 catch-up provision can help beef up the nest eggs of staffers who haven't steadily contributed to a retirement account. Employees of the following types of organizations are eligible to make these contributions:

  • Public school systems,
  • Home health service agencies,
  • Health and welfare service agencies,
  • Religious congregations, and
  • Conventions or associations of churches.

Broad eligibility: Generally, not-for-profit employees can participate in an employer's 403(b) plan immediately. Certain restrictions usually apply to 401(k) eligibility — for example, workers must be at least age 21 to open an account.

On the other hand, 401(k)s have certain benefits over 403(b)s. For one, there are many more 401(k) plan providers to choose from. Typically, this competition results in lower administrative fees. Participants also generally have greater investment options with a 401(k), such as individual stocks, bonds, low-expense mutual funds and exchange traded funds.

Growing and Evolving

Even if you currently offer employees a 403(b) plan, at least consider other options as your organization grows and evolves. You might want to survey workers to learn what they value in a retirement plan — and what they feel your current plans lacks. Also consult professional financial and benefits advisors who can help you evaluate features and costs.

Topics: Nonprofit Organizations

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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non profit organization retirement plans

What Retirement Plans can Nonprofits Use?

Nonprofit organizations can offer intrinsic benefits to employees, and they can also provide traditional benefits like retirement plans. Employees will eventually stop working someday, and a workplace retirement plan is one of the most powerful tools for building significant retirement savings. What’s more, those plans may provide tax advantages that staff members can’t find outside of the workplace.

So, which types of retirement plans work best for nonprofit organizations?

Retirement Plans for Nonprofits

Nonprofit organizations typically use 403(b) plans, 401(k) plans, SIMPLE IRA plans, and other retirement plans for employees. Traditionally, 403(b) plans were a default option for nonprofits, but 401(k) plans are a viable option for some organizations, and SIMPLE plans may make sense when employers want a basic plan with minimal costs.

Other plans are available (including DB, nonqualified plans, and more) and the rules for those plans can quickly get complicated. For most private organizations that simply want to help employees save for retirement, a 401(k), 403(b), or SIMPLE plan may be a good start. Governmental bodies and religious organizations can find 403(b) plans more useful—and some private nonprofits may choose 403(b) over 401(k) as well .

We’ll cover some unique features of 403(b)plans at the end of this article.

401(k) Plans vs. 403(b) Plans for Nonprofits

Nonprofit organizations primarily used 403(b) plans in the past, and many still use those plans. But the rules have changed over time, and private nonprofits may choose 401(k) plans for the following reasons:

  • Regulations now require many 403(b) plans to function more or less like 401(k) plans (maintaining a written plan document, for example).
  • There are more 401(k) providers to choose from, so 401(k) plans have more options and more competition to keep pricing competitive .
  • Some tax-exempt organizations, like 501(c)(6) business leagues , are not eligible to use 403(b) plans.

Significant contribution limits: Both 401(k) plans and 403(b) plans allow employees to save substantial amounts:

  • Employees can defer up to $20,500 of their pay for 2022.
  • Total contributions to an individual’s account, including employee salary deferral, employer matching, and profit-sharing contributions, can be as high as $61,000.
  • Catch-up contributions allow those over age 50 to contribute an additional $6,500.

Note: 403(b) plans may offer an additional catch-up contribution, described below.

Roth and pre-tax options: Both 401(k) plans and 403(b) plans allow after-tax Roth contributions, assuming the employer chooses to include that feature. Employees can generally save Roth money in the plan, even if they’re disqualified from making Roth IRA contributions.

Loans and Hardship withdrawals: Both types of plans may allow employees to access their savings in the retirement plan under certain conditions. However, the employer must choose to offer those options (some employers offer one or the other, and some employers don’t allow loans or hardships).

  • Loans: If allowed, employees can typically borrow up to $50,000 or 50 percent of their vested account balance (whichever is less).
  • Hardship withdrawals: If allowed, employees may be able to take a distribution from the plan, which may be subject to taxes and penalties. Employees generally need to qualify for a hardship withdrawal by showing that they need the funds.

While 403(b) and 401(k) plans are similar, that doesn’t mean they’re equivalent for all tax-exempt organizations. Scroll down for details on what makes 403(b) plans unique.


Retirement Plans for Not-for-Profit Organizations

A SIMPLE plan may be a less-expensive option. For a basic retirement account that allows employees to save meaningful amounts each year, a SIMPLE is typically sufficient.

No administration costs: Unlike 401(k) plans and many 403(b) plans, SIMPLEs do not require employers to pay annual administration or other costs typical of larger retirement plans.

Meaningful contribution limits: Employees can save up to $14,000 in a SIMPLE IRA during 2022. Those over age 50 can make an additional $3,000 catch-up contribution.

Easier to administer: SIMPLEs are somewhat rigid, and that makes them inexpensive and (usually) easy to work with. There’s no discrimination testing, but there are a few potential drawbacks to be aware of:

  • No Roth: SIMPLEs only allow for pre-tax contributions. If employees want to make after-tax savings, they may need to do so in a Roth IRA (if allowed).
  • No loans: Employees cannot borrow against their assets through the SIMPLE plan. This may make them hesitant to participate or cause tax issues if they take distributions.
  • Immediate vesting: Employees can withdraw funds from their SIMPLE account at any time. Once money hits the account (even if it’s employer money), the money is theirs to take when they want it. That may not be ideal if employees lack discipline or if the organization wants to incentivize long-term employment.
  • Early-withdrawal penalty: Taking distributions from a retirement account may result in income taxes, additional tax penalties, and other complications. With SIMPLE plans, the early withdrawal penalty is 25% (as opposed to 10% for traditional IRAs).
  • No other plan: SIMPLE plans may limit your ability to start other types of retirement plans during the same year.

Employer cost: The “costs” to employers are primarily the required employer contribution and the administrative tasks of running the plan. Employers must choose between :

  • 3 percent of pay: Employees receive 3 percent of their earnings each year.
  • 2 percent match: Employees receive a 100 percent match on their contributions, up to 2 percent of their pay.

In limited cases, the organization can reduce that contribution.

For most nonprofits, a SIMPLE is one of the least expensive and easiest-to-manage retirement plans. If you decide that you’re outgrowing a SIMPLE, you can always switch to a 401(k) or 403(b) (or another plan) down the road.

Payroll Deduction IRA

Payroll deduction IRAs are even less expensive and less restrictive than SIMPLEs. The organization does not make any contribution to employer accounts, so the cost is simply the administrative time it takes to help employees save money.

With a payroll deduction IRA, employees establish an individual retirement account (IRA), and the employer makes contributions for employees. Your employees could just open an IRA on their own, but many people don’t take action, and making things easier is sometimes all it takes to encourage healthy financial behavior.

Roth and traditional (maybe): Employees can choose to contribute on a pre-tax or after-tax basis. However, employees need to be eligible to use certain tax features (like Roth, or taking a deduction for contributions), and several factors in their financial lives can cause complications. Unlike a 401(k) or 403(b) plan, which allows everybody to contribute regardless of their income or other details, IRAs can be limited. Employees should verify their ability to make contributions with their tax advisor, as well as review IRS rules:

  • Roth contribution rules
  • Deductible contribution rules

If employees don’t qualify for deductible contributions or Roth contributions, they may still be able to make after-tax contributions. From there, they may choose to convert to Roth or take other actions.

Not automated: Employees need to verify their eligibility to contribute, and they need to complete any required tax reporting on their own. The W-2 will not show a reduced number for contributions to their account—employees are responsible for claiming deductions, among other things.

No employer discrimination testing or annual reporting: Because everybody uses their own IRA (and the “I” refers to “individual”), employers are not responsible for annual reporting on the program, and there’s no discrimination testing.

Immediate vesting: Since all money in a payroll deduction IRA is from the employee’s earnings, the funds are 100% immediately vested . Employees can take withdrawals or transfer funds at any time, but they may face taxes and penalties.

Other Types of Plans

For organizations with significant cash flows or highly compensated employees, defined benefit (DB) and nonqualified deferred-compensation (NQDC) plans may also be a good fit. The rules for those plans are different, and they naturally have pros and cons, but those plans are beyond the scope of this discussion. Staff may also have the opportunity to save retirement money in an HSA , but that’s related to the healthcare plan (if any).

What Makes 403(b) Plans Unique for Nonprofits

Although 401(k) plans have gained popularity for nonprofits, 403(b) plans offer several features that 401(k) plans cannot provide.

Reduced discrimination testing: Administering a 403(b) plan can be easier in some cases, especially if the organization doesn’t plan to make employer contributions (like matching or “profit-sharing” contributions). There’s no requirement to complete a top-heavy test or contribution (if your plan meets the criteria), and other requirements might be lighter. Those features may make it easier for highly-compensated employees to make significant contributions when other rank-and-file employees choose not to participate.

Additional catch-up: If your plan permits, employees might be able to make additional catch-up contributions of up to $3,000 per year. But the organization and any employee taking that route both need to meet several criteria . The employee must have 15 years of service with the same employer, and the organization must be the right type of organization. That option might not be available unless you are a:

  • Public school system
  • Home health service agency
  • Health and welfare service agency
  • Convention or association of churches (or associated organization)

Non-ERISA plans: Some 403(b) plans can operate without meeting requirements of ERISA. That includes many governmental and school 403(b) plans. Non-ERISA status reduces the administrative complexity of running the plan and may eliminate the need to file a Form 5500 each year. Private nonprofits can also qualify for non-ERISA status if they don’t have any employer contributions and have “limited involvement” in the retirement plan. In practice, most private nonprofits don’t meet the criteria. Also, while a non-ERISA plan isn’t subject to as many fiduciary obligations, that’s not necessarily a good thing.

Universal availability: 403(b) plans are typically available to all employees of the organization, with immediate entry into the plan. Some 401(k) plans limit enrollment to those who are at least 21 years old and who have worked for at least one year (as defined by plan rules). That said, 401(k) plans are allowed to use less-restrictive criteria. 403(b) plans can exclude some categories of workers, like part-time employees, but you need to mind the details.

Other differences: 403(b) plans have several other features that apply to specific organizations. For example, a minister housing allowance can be attractive for certain religious organizations. Also, post-severance contributions may allow for contributions to a former employee’s account.

Important Information

This article provides an overview of retirement plans to help you start the discussion within your organization. But it’s critical that you verify all information with a CPA or qualified tax preparer before making decisions. The author of this article is neither of those, and does not provide tax advice. What’s more, the article is written with no knowledge of your individual circumstances or other details that may be important. As a result, do not rely solely on what you find in these materials.

Go beyond a basic 401(k)

Go beyond a basic 401(k)

Give your employees more than just a 401(k), join the movement.

2023 Nonprofit Retirement Guide: 403(b) plans vs. 401(k) plans

2023 Nonprofit Retirement Guide: 403(b) plans vs. 401(k) plans

Key takeaways: 

  • Tax-exempt, nonprofit organizations can offer a 401(k), a 403(b), or both.
  • Recent regulatory changes are making nonprofit 401(k)s even more popular among many tax exempt organizations.
  • 401(k) plans are often significantly cheaper for both employers and employees
  • 401(k) plans provide greater flexibility with eligibility and features designed to drive high participation rates.

403(b) Overview

403(b)’s, also known as Tax-Sheltered Annuity (TSA) plans, are exclusively available to certain tax-exempt organizations (e.g., 501(c)(3)’s, schools, etc.) while 401(k)s can be used by any employer (private companies or nonprofits).  While 403(b) plans were once the go-to option for non-profits, high 403(b) fees, limited 403(b) eligibility options and their dwindling administrative edge has led many nonprofits to switch to 401(k)s. The 2022 Secure Act 2.0 may accelerate this trend away from 403(b)’s as the best retirement plan for many nonprofits.  

In this post we will discuss how new legislation is changing the comparisons of retirement plan options for nonprofits.  We’ll compare the differences between 403(b)s and 401(k)s, covering the: 

  • Types of 403(b) plans
  • Administrative duties of 403(b)s vs. 401(k)s
  • Eligibility options of 403(b)s vs 401(k)s
  • Why many employees prefer 401(k)s to 403(b)s 
  • Fees of 403(b)s vs. 401(k)s

In 2022, total assets in 401(k)s continued to outpace the growth of 403(b)s ( $1.4 trillion in 2022 ).  A number of factors may contribute to this trend.

non profit organization retirement plans

If you’re curious who some of the biggest names in the space are, check out our list of top 403(b) providers .

Which organizations are eligible for 403(b) plans? 

Organizations that are allowed to offer a 403(b) plan include: 

  • Organizations that fall under the 501(c)(3) Internal Revenue Code
  • Public School systems
  • Cooperative hospital service organizations
  • Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS)
  • Public school systems organized by Indian tribal governments
  • Certain ministers (empoyloyed by a 501(c)(3), self-employed, functioning as a minister in daily responsibilities with their employer, such as a hospital chaplain)

What is the difference between an ERISA and a non-ERISA 403(b) plan?

Unlike 401(k) plans, not every 403(b) plan must comply with ERISA regulations. In fact, non-ERISA plan assets accounted for 45% of all 403(b) assets, according to an April 2023 updated report from Brightscope and ICI .

non profit organization retirement plans

Whether a 403(b) plan is an ERISA or non-ERISA plan depends on whether the employer makes a contribution to employee accounts and the extent of their involvement. 

Non-ERISA 403(b) are often supplemental to other retirement plans offered by an employer (e.g., pensions, etc.) because Department of Labor Regulations place a number of constraints on employers that can decrease the number of employees that use the plan.  

With Non-ERISA 403(b) plans, employers: 

  • Cannot provide a match (or other employer contribution) to employees; and
  • Cannot adopt popular automatic enrollment or automatic escalation features

The benefit of having a Non-ERISA plan is reduced administrative and fiduciary responsibilities required under ERISA :

  • May not need to file an annual form 5500
  • May be exempt from annual large plan audit
  • May be exempt from annual nondiscrimination tests

While avoiding ERISA requirements may seem great on the surface, lack of employee protections may be one of the reasons 403(b)’s have historically been more expensive than 401(k) plans.  In fact, in 2022 AARP wrote : 

“403(b)s lack many of the basic protections that 401(k) plans have accumulated over the years. And they are stuffed with expensive investments that may be costing participants as much as $10 billion a year in excess fees ...

How are 403(b)s and 401(k)s the same?

Both 403(b)s and nonprofit 401(k) plans have the same annual contribution limits, which for 2024 are: 

Moreover, both 403(b)s and 401(k)s support:

  • Pretax, Roth or after-tax contributions
  • Loans and Hardship withdrawals
  • Roth employer contributions (new with 2023 Secure Act 2.0)  

403(b) vs 401(k) plans: Which is better for nonprofits?

In the past, conventional wisdom held that  403(b) plans were easier to administer than 401(k)s, but often more expensive - especially when it came to investments.  But the 2022 Secure Act 2.0 , has changed the legal differences between 403(b)s and 401(k)s considerably.  Under the new rules, administrative differences have narrowed, making 401(k) plans more popular with many non-profit organizations looking for a low cost retirement plan that is easy to administer.  To understand the key differences - let’s start with a review of the types of 403(b) plans - ERISA vs. Non-ERISA.  

401(k) vs. 403(b) - which is easier to administer?

From an administrative perspective, a non-ERISA plan is still generally easier to manage than a traditional 401(k) but comparable to a Safe Harbor 401(k).  

Unlike traditional 401(k)s, non-ERISA plans aren't subject to an annual audit and sponsors don’t have to file IRS Form 5500. Moreover, non-ERISA plans are not subject to key ERISA fiduciary standards and are exempt from the annual nondiscrimination testing . 

ERISA 403(b) plans, however, must still administer the ACP test (learn more about compliance testing here ) and file an annual 5500, but are not subject to the annual ADP and top-heavy tests .‍

401(k) vs. 403(b)s - which has more flexibility?  What is Universal Availability?

Compared to 401(k)s, 403(b) have significantly less flexibility when it comes to defining employee eligibility. Under  Internal Revenue Code 403(b)(12)(A)(ii) , most 403(b)s are subject to the  “universal availability requirement” which restricts employers from customizing eligibility based on age or service, (though some church organizations are exempt ).  

Universal availability can significantly increase the cost of the plan - especially if the non-profit plans to provide a match.  It can also significantly increase the chance of 403(b) administrative errors (it ranked #2 on the IRS’ list of top 10 403(b) plan failures ).

For example, a 501(c)3 could choose to base eligibility on 3, 6 or even 12 months of service - if they had a 401(k), but not if they had a 403(b).  Under the old rules, the primary way non-profits could limit eligibility was to exclude employees that worked fewer than 20 hours per week.    

Universal availability, however, is changing with SecureAct 2.0 , which soon requires employers to cover all employees that work at least 500 during three consecutive years.  If universal availability was hard to administer under the old rules, it will likely become more challenging after Secure Act 2.0.   

Pros and Cons of 403(b)’s vs. 401(k)’s

While easier year-end testing is indeed a benefit of non-ERISA 401(k)s, Safe Harbor 401(k)s offer employers similar ease with more flexible eligibility options which can significantly cut employer costs.

How to lower costs by switching to a Safe Harbor 401(k)

While Safe Harbor Plans require employers to provide a minimum contribution of at least 3.5%, the April 2023 update to the ICI/Brightscope 403(b) report found that nearly 40% of 403(b)’s would likely be able to switch to a Safe Harbor plan without significantly increasing their 401(k) contributions.  

Many non-profits can even lower employer contribution costs by switching to a 403(b) if they introduce service or age-based eligibility requirements!

Do nonprofit employees prefer a 401(k) to a 403(b)?

Employees are significantly more likely to use a 401(k) compared to a 403(b), suggesting that employees strongly prefer a 401(k) to a 403(b).  

According to a 2022 report from the Plan Sponsor Council of America (PSCA), only 79.4% of employees participated in their employer’s 403(b) plan, significantly less than 401(k) participation rates of 89.4%. PSCA’s 2022 reports also found that 403(b) participants saved considerably less - with an average savings rate of 6.9% vs. 8.3% for 401(k) participants . Taking into account both the higher savings and participation rates it appears that employees save nearly 40% more in a 401(k) vs. a 403(b).   

High 403(b) fees

While the prevalence of pension plans in many public sector employers may explain some of the gap, the perception of high fees may also play a crucial role.  Indeed, in 2022 Plan Sponsor wrote: 

“Despite there being a lot of good providers out there, there’s this assumption that many are high fee, low value…”

AARP was even more critical in 2022, writing:

The disturbing truth is that the retirement plans offered to more than 8 million public-school employees and many more nonprofit workers typically fall short of their private-sector counterparts.

Even the IRS noted the risks of high fees and advised that 403(b) “may have high administrative costs” as one of the primary “cons” of 403(b) plans.

Interestingly, 403(b) plan sponsors appear to be behind the curve on general perceptions as only 5.1% indicated that lowering plan costs was a key priority for 2022, according to PSCA.

The Match Matters

According to a recent article from Money , 

74% would be likely to leave their job for another company that offered better financial benefits, and the top two most enticing benefits are — again — a high-quality 401(k) or other retirement plan and a 401(k) matching program.

Unfortunately, non-ERISA 403(b)s cannot provide a company match (or other company contribution) to their employees.  

Employees value automatic savings

A recent Principal Survey , found that:

84% of workers who have been automatically enrolled into their workplace retirement plan say they are glad that their savings has been jump-started. 

Unfortunately, non-ERISA 403(b)s do not allow employers to leverage automatic savings programs like automatic enrollment with automatic savings escalations.

Are 403(b)s more expensive than 401(k)s?

While 403(b) plan fees have generally decreased over the past few years, they still have a fair amount to fall.  In fact, ICI’s April 2023 update found that the smallest 403(b)’s paid more than 1.08% in total plan fees on average while an unlucky 10% paid more than 2.3% in total plan fees.  

Are 403(b) investment fees higher than 401(k)s?

ICI’s 2023 report also showed that 403(b) Investment fees have room for improvement.  Here the smallest plans paid average fees of 0.60% and 0.78% for domestic and international stock funds, respectively.  Low-cost index funds in 401(k) plans from Fidelity and Vanguard, however, generally range from 0.3% to 0.8% - nearly 10x cheaper.

What kind of investments are offered in a 403(b) plan?

403(b) plans are also referred to as “tax sheltered annuity plans,” and not surprisingly, they include annuities in their investment menu (often alongside traditional mutual funds).  These generally come in two forms: variable annuities and fixed annuities.

While the inclusion of annuities may sound great, ICI’s April 2023 403(b) update update suggest that employees preferred mutual funds over annuities by nearly 2 to 1:

non profit organization retirement plans

2023 403(b) fee litigation

One area where 403(b) plan sponsors seem to have a different view from 401(k) sponsors is their willingness to use their recordkeeper’s proprietary investment products. While 401(k) sponsors are increasingly embracing open-architecture platforms that allow employers to go beyond the proprietary offerings of the recordkeeper, many 403(b) plan providers load up the plans with expensive, proprietary investment products.  

Indeed, University of California settled a $13M lawsuit in 2023 related to excessive fees associated withtheir 403(b) plan. 

Which retirement plan is best for your nonprofit?

If you have a 403(b) and are looking to make employer contributions, you may want to consider who will handle the increased administrative load of an ERISA plan. Or if you are wanting to customize employee eligibility, then a 401(k) plan might be the right option for your 501(c)3.

Note: The information contained in this post is not intended to be or relied on as legal advice.  You should consult an ERISA attorney or another professional plan consultant before making any decisions or changes.

non profit organization retirement plans

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.

non profit organization retirement plans

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Retirement plans 101: How to start (or evaluate) a plan for your nonprofit

Erika Young

  • Outsourced human resources services

A retirement savings plan is a “must-have” benefit for nonprofits to attract top talent. But setting up or changing a plan can be confusing, especially if you don’t have a specialized finance background.

What’s more, executive leaders have a fiduciary responsibility to manage the plan responsibly. If they don’t, they could be held personally liable.

Don’t fret. These hurdles are manageable with a little homework and support. Here’s a crash course in retirement plans for nonprofit and government agency leaders: 

Types of retirement plans for nonprofits

Most nonprofits choose a 401(k) or a 403(b) retirement plan for their employees. Traditionally, 401(k) plans were offered to employees of for-profit corporations and 403(b) plans were available to nonprofit workers. But today, some nonprofits can choose either type of plan.

Testing requirements, contribution limits and eligibility vary between 403(b) and 401(k) accounts. For example, employees with a 403(b) can contribute to the plan as soon as they start work. Because 403(b) plans offer “universal availability,” they’re not subject to the same testing requirements as 401(k) plans (like the ADP and top-heavy tests).

 A 403(b) plan could be set-up three different ways: as a group annuity contract, an individual annuity contract or a custodial account.

Knowing your plan type and how it’s set up is part of your fiduciary responsibility. Depending on how the account is set up, the fees and disclosure requirements may change. If you know how your plan is set up, you’ll know where to look to review, benchmark and compare information.

Who’s responsible?

Anyone that exercises discretionary authority or discretionary control with respect to the management or administration of the plan is a fiduciary. In terms of retirement plans, fiduciary responsibility covers four main “promises.” A fiduciary is expected to:

  • Act solely in the best interest of the participants and their beneficiaries.
  • Act for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan.
  • Carry out duties with the care, skill, prudence and diligence of a person familiar with such matters.
  • Ensure all document provisions are followed.
  • Diversify plan investments.
  • Understand the responsibilities of the plan’s service providers, and ensure they are completing their duties.

How do I become an expert?

Even if finance isn’t your fiduciaries’ “day job,” they’re still expected to administer their duties with the same skill and care as an expert in the field. Keep that in mind as you fill board openings. Or, consider working with a trusted advisor who can guide you through document reviews and discussions.

Two steps (performed on repeat) go a long way toward fulfilling your fiduciary responsibility: review and compare.

  • Review policy statements, plan documents and applications to make sure they are accurate; fees should be disclosed and be reasonable for the services provided.  
  • Review your investments, contribution rates and participation rates.
  • Compare everything to your plan documents and industry benchmarks.

The DOL recommends you review the plan regularly, and ERISA attorneys recommend benchmarking your plan every three years.

Want to learn more?

Get a crash course on everything you need to know about offering a retirement plan to your employees, including the various plan types available to nonprofits/governmental entities and the advantages and disadvantages of each at our National Conference Virtual Training Experience. Learn more on our conference website .

Interested in help with retirement plans?

Our associates can help you build a retirement plan that fits your needs today and tomorrow. See our solutions .

Erika Young

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Retirement Programs: Which One Is Right for Your Nonprofit?

non profit organization retirement plans

Thomas Raffa

With all the current changes and additions to regulations covering retirement programs, the choices of plan types have expanded—but so have the possible pitfalls to installing and maintaining a competitive retirement program for your nonprofit organization. This article is meant to cover some of the more popular “qualified” retirement plans available to nonprofits and some basic requirements to adopt and maintain an effective plan for your organization and its employees.

A “qualified” retirement plan is one that provides:

  • A tax exemption for the fund that is established to provide benefits; 1
  • A deduction by the employer for contributions made to the fund; 2 and
  • A deferral of the taxes to be paid by the employee on the employer’s contributions made on the employee’s behalf, the employee’s contributions, and the earnings that may accumulate on both within the retirement fund. 3

Standard Retirement Programs

There are two broad categories for qualified retirement plans: defined benefit plans and defined contribution plans. Defined benefit plans include pension and annuity plans that offer a specific benefit to the employee throughout his or her retirement. 4 < The benefit the employee is to receive at or during his or her retirement is based upon the amount of the employee’s wages and the years of service with the employer. An actuary must be employed each year to determine an amount, based upon certain assumptions, 5 that the employer must contribute to the plan trust on behalf of the employees to cover retirement benefits for each current employee as projected through retirement. The money is not specifically allocated to individual accounts maintained for each employee and employees cannot contribute into such a plan on their own behalf. In a defined benefit plan, the employer is solely responsible for funding the plan and ensuring that there are enough dollars in the plan trust to cover the retirement benefits projected by the actuary for the employees.

Defined benefit plans have lost their popularity over the years, especially among smaller nonprofit employers, as the annual costs are often unpredictable and the employer must fund the amounts as required by law each year and as determined by the actuary for the plan to be in compliance. If interest rates increase and performance of the investments within the plan are solid, the employer may see a reduction in the required annual contributions. However, costs are likely to go up in times of poor market performance. Changes in personnel within an organization can also affect the volatility of the required contributions. The risk (and reward) is on the employer; the employee takes no responsibility for contributions, investment selection, or performance of the fund.

Defined contributions plans include profit sharing and money purchase plans. For such plans a separate accounting must be provided for each employee who is covered by the plan, and the employee’s retirement benefit will be based solely on contributions made to the plan by the employer (and employee if allowed) and the earnings on these contributions. 6 The reason these types of plans are coming more into favor is not just that the employer has more control over the amounts the organization is required to contribute to the plan each year on behalf of its employees, it is also that the employees are allowed to “self-direct” the investment of contributions made on their behalf. Typically, the employee’s choice of investments is limited to a select group of investments; however, even with a limited number of funds, the employee now takes on the responsibility for the outcome of the dollars that will eventually be available at his or her retirement. The earnings (and losses) in each employee’s own investment portfolio are dictated by the investment choices made by that employee. In addition, a feature can be added to such plans to allow for the employee to contribute some of his or her compensation to this retirement portfolio (see “401(k) plans” below).

Of the two types of defined contribution plans available, profit sharing plans allow the employer more flexibility in the amount of the contributions made each year, in that the nonprofit organization can change the amount of the contributions it chooses to make each year on behalf of its eligible employees—as long as the contributions are “substantial and recurring.” The term “profit sharing” is a misnomer, however, as the contributions made annually to the plan have nothing to do with profits and such a plan can be maintained by a nonprofit organization. 7

Money purchase plans are also a type of defined contribution plan; however, unlike a profit sharing plan, an employer’s annual contributions are fixed (within the plan documents) as a percentage of eligible employees’ annual compensation. 8 For example, under a money purchase plan, the plan may require that the employer contribute 5% of each participating employee’s wages with no regard to the financial performance of the organization for that fiscal period.

Annuity plans are another form of defined contribution plans, which are funded through the direct purchase by the employer of an annuity contract or contracts for the employees. 9 In addition, certain nonprofit organizations 10 may provide retirement benefits for its employees through the purchase of annuities or by contributing to a custodial account invested in mutual funds. 11 This type of plan is typically referred to as a “403(b) plan” or a “tax-sheltered annuity plan” (TSA).

Also, 401(k) plans are now available to nonprofit organizations. In this type of plan, all contributions are considered to be employee contributions because the employee is given the option of taking the contribution in cash or having it paid to the plan. This is known as an “elective contribution” because the contributions coincide with a salary reduction agreement.12 Some know 401(k) plans as “cash or deferred arrangements” (CODAs) and in many cases, an employer may add a 401(k) “option” to the defined contribution plan so that both employer and employee contributions can be made to the employee’s account.

Simpler Retirement Programs

In addition to the standard plans, current law allows for SIMPLE13 retirement plans for employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer in the preceding year.14 However, the employer is not allowed to maintain any other plan. An eligible employer who establishes and maintains a SIMPLE plan for at least one year, but fails to qualify in a subsequent year (i.e., the employer employs more than 100 employees making in excess of $5,000 each per annum), will continue to be considered eligible for the two years following the last year in which they did qualify.15

There are two types of SIMPLE plans: a SIMPLE IRA and a SIMPLE 401(k). A SIMPLE IRA must permit each eligible employee to elect to have the employer make payments either directly to the employee in cash or as a contribution (i.e., a percentage of the employee’s compensation) to the employee’s SIMPLE account.16 Contributions are limited to $9,000 for 2004 and $10,000 for 2005, which are lower than employee contributions allowed in a standard 401(k) or 403(b) retirement program and, while employer contributions can be made to match these employee contributions, the employer contributions cannot exceed 3% of the contribution made by the employee contribution.17 This too is less than the limits imposed on the standard retirement program options. However, establishing and maintaining a SIMPLE program is, well, much simpler.

There is also little or no cost to establish and administrate such programs.

For standard 401(k) and 403(b) programs, plan documents must be adopted and filed with the authorities, summary descriptions of the plan must be given to each employee, annual discrimination testing must be performed by a qualified professional, and an information return (i.e., the Federal Form 5500) will need to be filed. Start-up costs to establish a qualified plan can run in excess of $1,000, while costs to ensure that the plan stays in compliance with ever-changing regulations as well as for annually testing for discrimination and filing the information return can cost an additional $750 to $1,500 each year.

However, for a SIMPLE IRA plan, a straightforward three-page form need only be completed by the employer to establish the plan. The form is not filed with the authorities, but rather maintained in the employer’s files. No annual filing or discrimination tests are required.

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As such, smaller nonprofits should consider using the funds they would spend to establish and administrate a 401(k) or 403(b) plan to make an additional contribution on behalf of their employees within a SIMPLE plan.

The limitations of employee contributions for a SIMPLE 401(k) plan are the same as the SIMPLE IRA, and the matching limitations are basically the same as well. Again, if you can live with the reduced contributions limits, the advantage to a SIMPLE 401(k) plan over the standard plan is that there are fewer tests for plan discrimination and no annual filing requirements, and as such, the cost to implement and maintain it will be less.

Steps to Implementation

While the laws and regulations governing qualified retirement programs are complex, this should not discourage a nonprofit organization from installing and aggressively funding a qualified pension plan. If we in the sector intend to attract and retain qualified individuals, we must provide competitive benefits, and retirement benefits are certainly some of the more important ones, especially for those employees with long-term commitments to our organization.

Determine the amount of funds your organization may be able to set aside for your employees annually. If the funds are significant, consider a defined contribution plan. If your organization cannot provide more than a few hundred dollars per employee (or a few thousand in total) and you have fewer than 100 employees, consider a SIMPLE plan.

Ask your employees about their interest in saving on their own behalf for their retirement. An employer may find that a confidential questionnaire given to each employee may assist them in making an informed decision about the type of plan they eventually establish. Ask the employees the amount or percentage of their compensation that they are likely to set aside if a plan were to be put in place and how much more they might be induced to save if the employer were to match their contribution. Be certain the employee understands the effect on his or her take-home pay in making a contribution with every pay period. Remember that federal and state income taxes are deferred on such contributions, so any contribution made by your employees should have less of an effect on their take-home pay than they might think (see table on page 80). Encourage your young people to invest in their retirement. The time value of money has an amazing effect on the dollars you set aside in the early years of your employment. For example, if an employee were to start saving for retirement at age 33 by setting aside $100 each month into a qualified pension plan through age 65 for a total investment of $39,600, he or she would have approximately $170,000 available for retirement at age 65. However, if he or she started to save at age 25 and stopped at age 33, for a total investment of only $10,800, that balance would accumulate to approximately the same amount of $170,000 at age 65.18 The idea is convince your employees to start early and to continue to contribute a percentage of their pay, as their pay increases, through the day they retire. They will be happy they did and the more participation among your employees within your defined contribution program, the more likely you will be to pass the annual discrimination testing.

If you decide that a SIMPLE plan is the way to go, all you need to do is establish tax-deferred accounts for your employees with any reputable bank or investment firm. Cost should be minimal. Just be certain to ask about asset management charges, which will fluctuate depending on the type of investments you may select for the plan.

If you do decide to go with a defined contribution plan, the amount you plan to invest annually (and the number of participating employees) is likely to determine the companies that are willing to do business with you. Large 401(k) providers typically will not work with small groups unless big dollars are involved. 403(b) providers tend to be more lenient with such requirements.

In addition, it is important to know that the company providing the investment vehicles for your pension contributions may not be in the business of administrating the defined contribution plan (i.e., ensuring compliance with the law). In such cases you need a third party administration (TPA) company to assist in the establishment and annual maintenance of the plan. (Such services and fees have been described previously in this article.)

When selecting either company, be certain to obtain a letter of engagement defining the services and detailing the fees. In addition to an asset management fee assessed on your plan investment, the investment company or investment manager may also charge additional fees for “other services” on the account.

While your organization should proceed with caution when implementing and maintaining a qualified retirement program, it should proceed. We owe it to our employees to give them a vehicle in which to save for their retirement and to assist them in the savings through making as much of an employer contribution as possible. Salary or hourly wages is only a part of compensation and we, as employers, should not make it the only part. I have seen many of my nonprofit clients faced with the dilemma of an employee with 10 to 20 years or more of tenure with their organization and no significant dollars on which to retire. It is daunting to think that after so many years of serving a nonprofit organization and building its program and reputation, your long-term employees might retire with little or no savings. Plan ahead and plan now. We, in the sector, dedicate our lives to helping others. Don’t forget the employees that dedicate themselves to such noble causes.

1. Internal Revenue Code Section 501(a); Reg. §1.401(f)-1(c)(1) 2. Code Sec. 404. An employer/company can deduct the amount of the contribution it makes to a qualified plan on behalf of its employees subject to certain limits. While such a “business” tax deduction may not necessarily be of interest to a tax-exempt nonprofit, the nonprofit should still comply with the limits set forth in the law, as allowing contributions to go beyond such limits will increase the possibility of not passing the discrimination tests that may be required depending on the type of qualified pension plan in place with the employer. 3. Code Sec. 402(a). Federal and state income tax is deferred on contributions made to a qualified plan by or on behalf of the employee subject to certain annual limitations. Employee contributions are subject to applicable social security tax. 4. Code Sec. 414(J) 5. Reg. §1.401-1(b)(1)(i) 6. Code Sec. 414(j) 7. Code Sec 401(a)(27) 8. Reg. §1.401(b)(1)(i) 9. Code Secs. 403(a)(1) and 404(a)(2) 10. Public school systems and tax-exempt educational, charitable, or religious organizations (i.e., 501(c)(3) organizations) 11. Code Sec. 401(b)(1)(A) 12. Code Secs. 401(k) and 402(e)(3; Reg. §1.401(k)-1 and 1.401(a)-1(d) 13. SIMPLE is an acronym that stands for Savings Incentive Match Plan for Employees. 14. Code Sec. 401(k)(11)(C) and 408(p)(2)(C)(i)(I) 15. Code Sec. 40-1(k)(11)(A) and (D)(i); Code Sec. 408(p)(2)(C)(i)(II) 16. Code Sec. 408(p)(2)(A)(ii) 17. Code Sec. 408(p)(2)(A)(iii) and Code Sec. 408(p)(2)(C)(ii). 18. This calculation assumed an annual interest rate of 7.5% compounded monthly. 19. Although you can use fewer hours and a lower age, you cannot generally go above these amounts. 20. For for-profit entities, there are limitations on the amount of contributions that the employer can deduct. 21. Vesting represents the non-forfeitable interest of the employee in his or her account balance. By law, an employee is fully vested in any contribution he or she makes on his or her own behalf. Contributions made by the employer on behalf of the employee will “vest” based on the vesting schedule defined within the plan documents (with the exception of a SIMPLE IRA, which is always 100% “owned” by the employee whether the contribution was made by the employer or the employee). Thus, if a plan defines vesting at a rate of 20% annually, an employee would receive 40% of the employer’s contributions if that employee were to leave the employ of the organization after two years of service (as defined by the plan). 22. The top-heavy test is a test designed to ensure against a plan primarily benefiting the key employees or those that are considered by law to be highly compensated. A plan that does not pass this test is considered to be top heavy. 23. The ADP or the Actual Deferral Percentage test is a special test designed to limit the extent to which elective contributions made on behalf of highly compensated employees may exceed the elective contributions made on behalf of non-highly compensated employees under a 401(k) plan. 24. The ACP or the Actual Contribution Percentage test is a special nondiscrimination test applied to employer matching contributions and employee contributions. 25. The limits established by Internal Revenue Code (IRC) Section 415 currently require that annual additions to an employee’s account under a defined contribution plan cannot exceed the lesser of $40,000 or 100% of the employee’s compensation (not exceeding $200,000). For defined benefit plans, the IRC defines the maximum annual retirement benefit for any participant as one not to exceed the lesser of $160,000 or 100% of the participant’s average compensation (not exceeding $200,000) for the participant’s three consecutive years of highest compensation.

About the Author

Thomas Raffa is the managing partner of RAFFA, P.C., a certified public accounting, technology, and consulting firm based in Washington, D.C., with over 100 professionals dedicated to the nonprofit sector. Call 202-822-5000,,

About the author

non profit organization retirement plans

Thomas Raffa is the managing partner of Raffa and Associates, P.C., a certified public accounting and consulting firm based in Washington D.C. with a financial services subsidiary in Maryland. The firm currently employs 100 professionals who serve the nonprofit sector by providing a wide variety of services to over 300 international, national, and community-based nonprofit organizations. Tom has 24 years experience and currently serves on the board of directors of two national nonprofit organizations. He often speaks at seminars and training workshops on accounting, tax, and business-related matters.

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Retirement and Financial

Nonprofit 401(k): The 403(b) Plan vs. 401(k) Plan

non profit organization retirement plans

In This Post:

Many companies offer different pension plans, with 401(k) and 403(b) being the most common ones. They are very similar, but the main difference is that for-profit organizations offer  401(k) plans , and nonprofit organizations offer  403(b) plans .   

They are so similar that sometimes the 403(b) is framed as the  nonprofit 401(k)  for nonprofit organizations.

non profit organization retirement plans

What is a 401(k) & What is a 403(b) Plan?

A  401(k) is a retirement savings plan  that allows you to contribute a predetermined percentage from your salary before paying taxes, lowering the employee’s taxable income for the year. The employer may also get involved and match part or all of the employee’s contributions.  

However, that income will be taxed when the holders begin to take funds from their 401(k) after 59 and a half. That is why the 401(k) is referred to as a tax-deferred account.  

The structure of 403(b) plans and 401(k) plans is almost identical.   

However, 403(b) plans are offered exclusively to workers of tax-exempt organizations. This plan is frequently utilized by government personnel, medical professionals, librarians, self-employed clergy, and public school employees such as teachers and administrators.

non profit organization retirement plans

Which Organizations are Eligible for 403(b) Plans?

According to the IRS, a 403(b) plan, also known as a tax-sheltered annuity (TSA), can only be offered by public schools and some tax-exempt organizations.  

These organizations may represent causes like religion, education, philanthropy, science, literacy, and preventing cruelty to children or animals.   

A qualified 403(b) organization  is generally organized as a company, fund, community chest, or foundation. This excludes individual partnerships or for-profit corporations.  

Here are some examples of 403(b) eligible organizations:  

  • Public schools’ systems.  
  • Cooperative hospital service organizations.  
  • The Armed Forces.   
  • The University of Health Sciences (USUHS).  
  • Public school systems  organized by Native American tribal governments.  
  • Certain ministers.  
  • Any 501(c)(3) entity, such as a nonprofit university, religious group, or social service agency.

Who can Offer a 401(k)?

Employers have more flexibility with the 401(k) plan. Big for-profit US corporations mainly use this retirement plan.   

Charitable and nonprofitable organizations are also qualified to provide a 401(k) and a 403(b)-retirement plan; however, this is rare.   

To summarize, practically any company may provide a 401(k) plan.

non profit organization retirement plans

Knowing the Difference Between 401(k) & 403(b) Plan

The main takeaway between 401(k) and 403(b) is the kind of company that sponsors the plans—401(k) plans are accessible from private, for-profit enterprises. In contrast, 403(b) plans are exclusively available from nonprofit organizations and government employers.  

Another significant difference between 403(b) and 401(k) plans is the investment possibilities each can provide.

Legal Differences Between 401(k) & 403(b) Plans

Notably, 403(b) plans are exempt from many of the rules contained in the  Employee Retirement Income Security Act (ERISA) , which controls eligible, tax-deferred retirement assets such as 401(k)s and 403(b)s.   

For example, the 403(b) plan is immune to annual nondiscrimination tests.   

The testing helps prevent management-level or, in other words, “highly compensated” personnel from earning a disproportionate number of benefits under a specific plan. The basis for this and other exclusions is a long-standing  Department of Labor regulation that states  that 403(b) plans are not officially classified as employer-sponsored if contributions are not funded by the employer.   

On the other hand,   employers who make contributions to employee 403(b) accounts  are subject to the same ERISA restrictions and reporting obligations as those that provide 401(k) plans.   

To be included in a 403(b) plan, investment funds must also qualify as a registered investment business under  the 1940 Securities and Exchange Act . This does not apply to 401(k) investment plans.

Practical Differences Between 401(k) & 403(b) Plans

Although in 403(b) plans, employers are legally permitted to pay matches to their participants’ contributions, most firms are unwilling to offer matches to maintain their ERISA exemption.   

As a result, 401(k) plans provide match schemes at a much more significant percentage.   

However, if an employee has worked for a charity or government agency for  more than 15 years , they may be entitled to make additional catch-up payments to their 403(b) plans that those with 401(k) plans cannot.   

Another distinction between 401(k) and 403(b) plans is that  non-ERISA 403(b) plans can have substantially lower expense ratios  due to less rigorous reporting requirements.  

Typically, the plan providers and administrators change depending on the plan. Furthermore, mutual fund firms often manage 401(k) plans, whereas insurance companies typically manage 403(b) plans.

Similarities Between 401(k) & 403(b)

  • The maximum yearly contribution in 2020 and 2021 is $19,500.  
  • Employees over 50 can make an extra catch-up contribution of $6,500 for a total permitted contribution of $26,000.  
  • All employees of the company should be entitled to participate.  
  • The total employee voluntary deferral plus Roth IRA and after-tax contributions are restricted to less than $57,000 or 100% of the employee’s contributions. This restriction applies to both employee and employer contributions.  
  • 403(b) members are subject to additional requirements if they hold 50% of another firm with a 401(k) plan.  
  • The plan’s governing laws can terminate both the 401(k) and 403(b) plans.  
  • Both types of plans provide an after-tax Roth option.  

How to Decide Between 401(k) vs. 403(b)

When the employer provides both options, which is rare, it is essential to know that the IRS doesn’t allow mergers or transfers of assets between these two funds. Therefore, by choosing one, the employee must know what works best for them and be dedicated to the selected plan.   

The 401(k) funds are usually more expensive for the company, thus offering a more comprehensive range and a better-quality investment option. They provide mutual funds, annuities, stocks, and bonds, whereas 403(b) plans offer only mutual funds and annuities.    

403(b)s, on the other hand, have more detailed  compliance testing requirements  than 401(k)s. However, these are sometimes provider-dependent.   

Governmental, non-ERISA (Employee Retirement Income Security Act) enterprises would profit significantly from a 403(b) over a 401(k). For example, they could quadruple their deferrals, contribute $38,000 pre-tax, and so on.   

However, if not a government institution, it is most likely an ERISA plan, making a 403(b) even more akin to a 401(k).  

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On a Final Note 

Employers considering offering a retirement plan for their employees are faced with multiple choices. Specifically, tax-exempt, nonprofit organizations can choose between providing a nonprofit 403(b), a  nonprofit 401(k) , or both.  

Nearly eight out of ten millionaires built their wealth primarily through their workplace retirement plans, so these plans can be a good selling point in recruiting. Moreover, they can help prevent low retention and high turnover.  

By regularly investing in  growth stock mutual funds , a person’s funds can significantly grow and collect money from compound interest.


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Retirement Plans for Employees of Nonprofits

Most nonprofit employers offer retirement plans to their employees.

Most nonprofit employers offer retirement plans to their employees.

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More Articles

  •   1. Do You Have to File Form 5500 for a Simplified Employee Pension?
  •   2. How Much Money Do I Need to Start a Retirement Account?
  •   3. Are IRA Accounts ERISA Qualified?

Retirement benefits can help a nonprofit organization attract the best talent, and most employers in this sector offer retirement plans. But many nonprofits, particularly the smaller ones, fear retirement plan costs and bureaucratic red tape even though low-cost retirement plan options are available with little or no hassle. The Internal Revenue Service shows that nonprofits in 2013 can select from at least six different retirement plans with differing levels of employer involvement.

Common Benefit

Three-fourths of employees in the nonprofit sector have access to an employer-sponsored retirement plan, according to a 2012 survey of the sector by TIAA-CREF Institute and the Independent Sector website. Of those with plan access, 69 percent had a defined-contribution retirement plan and the remainder a traditional defined-benefit pension plan. Of those with access to a defined-contribution plan, 76 percent said they were enrolled and making contributions. The study showed that just 9 percent of those employed by large nonprofit organizations lacked access to an employer-sponsored retirement plan, but it also said 34 percent of employees in organizations with fewer than 50 employees had no access to an employer-sponsored plan.

Simplest Arrangement

The simplest retirement plan option for nonprofit organizations, according to the IRS, is a payroll deduction individual retirement account in which the employer withholds up to $5,500 annually in IRA contributions from the employee’s pay and deposits the money in the employee’s IRA. This plan can even be offered by small nonprofits. No reports or audits are required, because the employer’s only involvement is depositing withheld funds into employee IRAs.

Employer Contributes

Nonprofit employers who want to contribute to their employees’ IRAs can establish a Simplified Employee Pension IRA -- or SEP IRA -- and contribute to the employee’s IRA up to 25 percent of the employee’s compensation. Or they can set up a Savings Incentive Match Plan for Employees IRA, or SIMPLE IRA, giving the employee an opportunity to contribute up to $12,000 and the nonprofit to match employee IRA contributions up to a maximum 3 percent of the employee’s compensation. These programs can be set up easily and don’t require the nonprofit to file annual reports.

Defined Contribution Plans

Nonprofit employers can also offer their workers defined-contribution plans similar to the 401(k) plans offered by for-profit corporations. Any nonprofit organization can offer employees a 457(b) plan with a maximum contribution limit of $17,500 for combined employee and employer contributions. Charities and other 501(c)(3) nonprofits also can offer a 403(b) plan, to which the employee can contribute up to $17,500 a year. The employer also can contribute, with a limit of $51,000 or 100 percent of the employee’s compensation on combined employee and employer contributions.

Traditional Pension

Nonprofit employers also can offer a traditional employer-funded, defined-benefit pension plan. These programs pay a specified monthly amount when the employee retires. Traditional pension plans require that an actuary annually determine the contribution level needed to provide the promised retirement benefits. Traditional pension plans are subject to audits and nondiscrimination testing.

  • Independent Sector: Financial Security and Careers in the Nonprofit and Philanthropic Sector
  • Internal Revenue Service: Publication 4484 -- Choosing a Retirement Plan

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403B Retirement Plans

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Although most 403(b) plans involve both employee and employer contributions, employees can benefit even if the employer does not contribute. Employees voluntarily elect to make pre-tax contributions through payroll deductions up to an annual maximum limit.

To provide added benefit and encourage greater participation, employers often match some portion of the amount deferred by each employee. These matching programs can be set up nearly however the employer wishes, as long as the predetermined percentages are consistently followed. Employers can match 100% for the first 4% deferred by the employee, 50% for the first 5%, 25% for the first 10%, etc.

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401(k) Fees: What Plan Sponsors and Participants Need to Know

Author: Penelope Team

By identifying and managing these fees, you can ensure a larger portion of your money remains invested and grows, setting you up for a more secure financial future. 

Let's go over your plan details to pinpoint where you might be paying too much and discuss strategies to reduce these costs.

What Fees Are Included in Your 401(k)?

When choosing a 401(k) plan , you need to be aware of the different fees involved because they can substantially reduce your retirement funds over time.

Let's go over the main types of fees and charges you'll encounter with your 401(k) plan :

  • Plan Administration Fees: These are necessary for the routine management of your retirement plan, covering things like recordkeeping and legal services. Typically, these costs are shared among all plan participants.
  • Investment Management Fees: These fees are charged for the active management of the investments within your plan. They can range from 0.10% to more than 2% of the assets under management (AUM).
  • Individual Service Fees: If you opt for additional features like loans or hardship withdrawals, you may incur individual service fees. These are only charged to participants who use these extra services.
  • Sales Charges and 12b-1 Fees: Not all plans have them, but you might encounter sales charges when buying or selling mutual fund shares, and 12b-1 fees for fund marketing and distribution.
  • Miscellaneous Fees: These can include charges for special services like investment advice, fund transfers, and finder's fees. Make sure to check your plan's fee disclosure to see what applies to you.

Why Do 401(k) Fees Matter?

Your retirement savings is directly impacted by these 401(k) fees. It reduces the amount of money that can grow through investment. Over the years, even small fees can compound and significantly decrease the total amount you have at retirement.

Here’s why it’s essential to keep a close eye on these fees:

Compound Growth Reduction

Fees are deducted from your account balance, reducing the amount of money that benefits from compound growth over time. Lower balances due to fees mean less money earning interest and dividends, which can add up to substantial losses over decades.

Impact on Investment Returns

High fees can negate the returns from good investment performance. For example, if your investment gains are 7% for the year but your fees amount to 2%, your net gain drops to 5%. This difference becomes more pronounced over time.

Variability in Fee Structures

Different 401(k) plans charge different fees. Some may have higher administrative costs but lower investment fees, and vice versa. It’s crucial to understand what you’re being charged and why, so you can assess whether you’re getting good value.

Availability of Alternatives

Sometimes, by comparing fees, you might find more cost-effective alternatives that offer similar or better benefits without eroding your savings as much.

In essence, being informed about the plan fees you’re paying and actively seeking ways to minimize operating expenses will lead to a healthier retirement fund.

What Are the Main Types of 40(k) Fees

Plan administration fees.

Plan Administration Fees are essential costs associated with managing a 401(k) plan. These fees cover the administrative services necessary for the day-to-day operation of the plan, including:

  • Recordkeeping: Maintaining accurate records of each participant's contributions, investments, earnings, and withdrawals.
  • Accounting: Managing the plan’s financial transactions and ensuring they are accurately reported.
  • Legal Services: Ensuring the plan complies with federal regulations and handling legal matters that may arise.
  • Customer Support: Providing assistance to plan participants regarding their accounts and investment choices.

These fees can be structured in various ways depending on the plan. They might be charged as a flat fee, as a percentage of plan assets, or per participant.

Often, retirement plan sponsors might choose to cover some or all of these costs, but frequently, they are passed on to plan participants, affecting overall investment returns.

Investment Fees

Investment fees are charges associated with the management of the investments within a 401(k) plan. These fees are one of the most significant costs in most retirement plans and can vary widely depending on the specific investment choices. Here’s a breakdown of the common types of investment fees:

  • Expense Ratios: This is the most common type of investment fee, which covers the cost of managing the investment fund. It is expressed as a percentage of the assets you have invested in the fund. For example, an expense ratio of 0.5% means that you will pay $5 annually for every $1,000 invested in the fund.
  • 12b-1 Fees: These are included in the fund’s expense ratio and are used for marketing and distribution expenses. A high 12b-1 fee can be a red flag because it suggests that a significant portion of the fund’s expenses is going toward advertising rather than managing the fund's investments.
  • Management Fees: These fees pay for the investment decisions made by the fund managers, including the selection of securities and the timing of their purchase and sale.
  • Sales Loads: Some funds charge a sales load, which is a fee to buy into or exit from the fund. These can be "front-end" (charged when you buy the fund) or "back-end" (charged when you sell the fund) and are designed to compensate the brokers who distribute the fund.

Individual Service Fees

Individual Service Fees in a 401(k) plan are specific charges that apply only to participants who choose to utilize certain features or services beyond the standard offerings of the plan. These fees are not part of the regular administrative or investment costs that all participants might pay. Here are some common types of individual service fees:

  • Loan Origination Fees: If you decide to take a loan from your 401(k), there might be a fee for processing and setting up the loan. This covers the administrative work involved in managing and tracking the loan.
  • Withdrawal Fees: Some plans charge fees for processing certain types of withdrawals, such as hardship withdrawals. These fees compensate for the additional administrative work required to assess and process these requests.
  • QDRO Processing Fees: In cases of divorce, a Qualified Domestic Relations Order (QDRO) allows for part of a 401(k) account to be allocated to a former spouse. Processing a QDRO can be complex, and many plans charge a fee for this service.
  • Investment Advice Fees: Some plans offer personalized investment advice, either through a human advisor or an automated system. Participants opting for these services may incur additional fees.

How to Read Your 401(k) Statements

Here’s a guide to help you navigate the key sections of your 401(k) statement:

1. Account Summary

This section provides an overview of your account, including the total balance at the beginning and end of the statement period, total contributions (both yours and your employer's), any rollovers, and the earnings or losses during the period. It gives you a snapshot of your account’s performance.

2. Contributions

In this section you’ll see detailed information on the contributions made during the statement period. This includes your pre-tax or Roth contributions, any catch-up contributions (if applicable), and employer contributions, such as matching or profit-sharing.

Read more: 401(k) Contribution Limits 2024

3. Investments

This section lists all the investment options within your plan and shows how your assets are allocated among them. For each investment, you'll find the balance at the start and end of the period, purchases, sales, and any changes in value. It often includes performance data, like the percentage change, which helps you assess how each investment is doing.

4. Fees and Expenses

Look for a breakdown of the fees deducted from your account, including plan administration fees, individual service fees, and investment fees. Understanding these fees is essential as they directly impact your investment returns.

5. Personal Rate of Return

This metric shows the performance of your investments over the statement period, adjusted for any contributions and withdrawals. It’s a useful indicator of how effectively your investments are growing.

6. Beneficiary Information

This part confirms the designated beneficiaries for your account, which is crucial for ensuring your funds are distributed according to your wishes in case of your death.

Tips for Reviewing Your 401(k) Statement:

  • Check Contributions: Verify that your contributions and any employer contributions are correctly recorded and match your expectations.
  • Assess Performance: Compare the performance of your investments against relevant benchmarks to see if they are meeting your retirement goals.
  • Review Fees: Ensure you understand all fees charged to your account. High fees can eat into your savings over time. Look for any hidden fees, to reduce your expenses.
  • Update Beneficiaries: Make sure your beneficiary designations are up to date to reflect any changes in your personal circumstances.

Who Pays 401(k) Fees: the Employer or the Participant?

The answer varies depending on the fee type and plan structure.

Employer-Paid Fees

For employers, certain "settlor expenses" — costs associated with the establishment and structural decisions of the plan — cannot be paid from plan assets. For example, fees for consulting on whether to offer a plan must come from corporate funds.

You can use plan assets to cover other administrative expenses associated with running the plan.

As an employer, paying plan administration fees yourself has several advantages:

  • Reduced Fiduciary Liability: Covering these fees reduces the risk of fiduciary breaches associated with excessive fee payments.
  • Tax Benefits: These payments are tax deductible, and with incentives like the SECURE Act tax credits for new plans and automatic enrollment, your savings could increase.
  • Enhanced Retirement Savings: If you participate in the plan, paying these fees can increase your personal retirement savings since more of your contributions remain invested.

Participant-Paid Fees

Participants typically cover fees tied directly to their investment choices and any individual services they use. Investment management fees are deducted from each participant's account based on the specific funds they have chosen.

Fees for optional services, such as plan loans, are paid directly by the users of these services.

Regardless of who pays the fees, if you are the employer, you have an ongoing duty to monitor all plan fees and ensure they are reasonable. This ensures the plan remains beneficial for participants and compliant with regulatory standards.

How to Avoid 401(k) Fees

To minimize 401(k) fees, choose plans with low-cost index funds and scrutinize the expense ratios. Opt for plans with straightforward fee structures and ensure any individual service fees are necessary before using those services.

Regularly review your plan's fee disclosures to stay informed about any changes. Consider negotiating with providers for lower fees, especially as your plan grows.

If you're an employer, consider covering some administrative costs to enhance the plan's value for employees.

What Are Normal 401k Fees?

Normal 401(k) fees typically include plan administration fees, investment management fees, and individual service fees. These generally range from 0.5% to 2% of assets annually, with lower fees often found in larger plans due to economies of scale.

If you need a 401(k) plan, talk to one of our retirement specialists to  learn more about our retirement plans  at Penelope.

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9 Best Retirement Plans for May 2024

P lanning for retirement is an important financial step, and you have plenty of options to choose from when selecting a retirement plan. Understanding how these accounts work and the benefits they offer are an important part of the process. Here’s a look at the top nine types of retirement plans.

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What Are the Best Retirement Plans?

Some retirement plans are designed for people with full-time jobs. Some are meant exclusively for business owners. Others are adaptable to anyone, no matter their situation. Each has its own benefits and drawbacks.

  • Traditional IRA
  • Solo 401(k)
  • Defined benefit plan

1. Traditional IRA

An individual retirement account is a savings plan that any individual with a taxable income can open and manage themselves. The money you contribute to a traditional IRA grows tax-free, so you won’t pay taxes until you withdraw it, an advantage if you’re in a higher tax bracket now than you plan to be in retirement.

You can open a traditional IRA at a bank, credit union or brokerage. This makes traditional IRAs accessible to anyone, and they give you the freedom to choose the investment options you can afford.

2. Roth IRA

A Roth IRA is similar to a traditional IRA. The primary difference between them is that with a Roth IRA, you pay taxes on contributions as you make them instead of when you withdraw the money upon retirement. If you’re in a lower tax bracket now than you expect to be in retirement, a Roth IRA can offer some tax advantages.

Also, unlike some of the alternatives, a Roth IRA will allow you to start withdrawing your contributions to the account early under certain circumstances. Roth IRAs are also accessible for most people, as you can open an account at many banks, credit unions and brokerages.

A Simplified Employee Pension IRA has a similar structure to a traditional IRA. The main difference is that it’s designed so that small businesses can set up and administer a retirement account for employees without the high costs associated with other employer-sponsored plans. As of 2024, the employer is allowed to contribute 25% of an employee’s income up to a maximum amount of $69,000.

Given that the contribution is dependent on income, in years when the business makes less money, you can make smaller contributions. This is beneficial if you are the employer, but less so if you are the employee.


A Savings Incentive Match Plan for Employees IRA is also intended for use by small-business owners. To qualify for a SIMPLE IRA, a business must have 100 employees or fewer and not offer another retirement plan.

Under this plan, the employer must contribute to the account each year — either a 2% nonelective contribution or up to a 3% match of each employee’s compensation. If an employee leaves the company, they keep all contributions made.

A 401(k) is the most common retirement plan offered by employers. A 401(k) is tax-free until you are ready to withdraw the money, at which point you pay income tax on the amount you take out.

Many employers match contributions that you make into a 401(k). You may not be allowed to keep all of your employer’s contributions if you leave the company before you are fully vested. However, you can roll over contributions into your new employer’s 401(k) plan or into an IRA.

6. Solo 401(k)

A solo 401(k) is similar to a standard 401(k), but it’s for self-employed individuals with no employees. That means you can make contributions as both an employer and an employee — which translates to potentially more tax-deferred savings than you’re allowed with a standard 401(k).

You can contribute as much as 100% of your earned income from self-employment, up to contribution limits — $23,000 in 2024, plus a catch-up contribution of $7,500 if you’re age 50 or older. The limit on your contributions as an employer is 25% of your employee compensation from the business, up to $69,000, plus a catch-up contribution.

A 403(b) plan is offered to employees of public schools and certain nonprofits, such as churches and 501(c)(3) organizations. As with 401(k) contributions, 403(b) contributions are tax-deferred, and so is the growth of funds in your account. You’re not taxed until you withdraw the money.

Some employers offer Roth versions in addition to standard 403(b)s. With a Roth 403(b) account, you make contributions from after-tax income and withdraw funds tax-free in retirement.

Annuities are contracts with insurance companies. In exchange for your purchase paid through a lump sum or in installments, the insurance company agrees to make one or more payments to you. You can take the payout as a lump sum or as a series of payments.

There are three primary types of annuities:

  • Indexed annuity: Returns are tied to an index, such as the S&P 500
  • Fixed annuity: Offers a fixed interest rate on your funds and periodic payments of a predetermined dollar amount
  • Variable annuity: Allows the insurance company to invest your funds, which grow tax-free at a variable interest rate

9. Defined Benefit Plan

A defined benefit plan is the type of retirement plan most people probably associate with employee pensions. Recipients receive a fixed, predetermined benefit when they retire based on a set dollar amount or a percentage of their salary. With a defined benefit plan, your employer contributes most of the funds, and you know in advance how much you’ll receive when you retire.

Other Options for Retirement

These retirement plans tend to be better known and more common than other options, but you can set aside money in additional accounts to pay for expenses during retirement. For example, if you still have money left over in a 529 plan used to pay for your education expenses, you may be able to transfer that money to a Roth IRA .

Another valuable account to consider is a health savings account. You contribute tax-free money to the HSA, and it grows tax-free. You can avoid paying taxes on withdrawals as long as you use the money to cover qualified medical expenses.

Benefits To Consider When Choosing a Retirement Plan

Retirement plans are not one-size-fits-all, so it’s important to choose the combination of accounts that can help you achieve your retirement goals. By definition, all retirement plans are tax-advantaged, but it’s helpful to know when you will pay taxes on the withdrawals you make. If you’re decades away from retirement and earning an entry-level salary, you may prefer paying taxes now by contributing to a Roth account. If you’re at the end of your career, it may make more sense to defer tax payments until you’re making withdrawals at your lower retirement-era tax bracket.

If you’re self-employed, setting up a retirement account is essential since you don’t have an employer offering this benefit. Conversely, if your employer matches contributions to your retirement account, take advantage of it. The money in your 401(k) is all yours after you’re fully vested, so it’s essentially free money.

Investment Strategies for Retirement

The best investment strategy for retirement is to start saving whatever you can put away now. This gives your money more time to grow. If your employer offers a retirement plan, take advantage of your employer’s plan, especially if they match what you put in. Then begin maximizing your annual contributions each year to an IRA and your 401(k), if you have one. Your financial advisor can help you understand your options.

  • A 401(k) is the most common type of retirement plan offered by employers, edging out defined benefit plans, according to an IBISWorld analysis.
  • A traditional IRA is the most straightforward retirement plan. Anyone who earns an income can open one, so there are fewer hoops to jump through to see if you qualify.
  • A retirement plan is a personal choice, dependent on when you would rather be taxed and what kind of employer contributions you expect. The best plan for a business owner is not the best plan for an employee, so deciding if a 401(k) or another retirement account type is best requires research or the advice of a professional .
  • The primary difference between a 403(b) and a 401(k) is the type of employer that offers them. Public schools and certain charitable organizations sponsor 403(b) plans, while for-profit companies sponsor 401(k)s.
  • They're different products, and one isn't necessarily better than the other. Roth IRAs have the benefit of being individual plans — you don't need an employer to sponsor one. In addition, you withdraw money tax-free in retirement. The main benefits of a 401(k) are the higher contribution limits and your employer's ability to contribute funds on your behalf.

Allison Hache and Monica White contributed to the reporting for this article.

This article originally appeared on : 9 Best Retirement Plans for May 2024

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