Three Trends in Nonprofit Plan Modernization

I remember when I was a child my dad told me about the places he had lived in. There was an evolution over his lifetime, and he measured that evolution by the number of lightbulbs that were required in each successive house.  Well for those of you who have been following my blog posts, you’ll know that I recently moved into a new community, and while I won’t tell you exactly how many lightbulbs this house requires, let’s just say that the previous owner liked it bright.  So bright in fact that I was concerned about what the electric bill was going to be, just from the lights.  Thankfully, modern technology has given us LEDs.  Its better quality light, the energy usage can be significantly less and they don’t heat up like other bulb options, and LEDs will supposedly last many years.  Modernization has made my life more efficient, and therefore better.

This got me thinking about modernization in general, and of course we see it everywhere. For example, where are advisors spending their time today?  Modernization.  There are three key areas that we’ve seen advisors focusing on with nonprofit organizations: sponsor control, governance, and plan design features.

Sponsor control

Sponsor control is a big deal, especially among 403(b) plans. You can’t even get to effective governance or plan design if the sponsor doesn’t have control over the plan.  Lack of control is still relatively common among 403(b) plans that have either individual annuities issued to participants, or “quasi group annuities” where there is a group annuity, but all control and contract rights belong to participants.  Advisors are looking for providers and contract structures that allow for fiduciary control so changes can be implemented that will enhance the plan.


Advisors are also spending a great deal of time establishing and fine tuning the plans’ governance. While most are familiar with basic governance such as an investment policy statement, additional policies around plan administration, fees, and education are becoming commonplace.  Investment policies and reviews are focusing not only on whether the investment options are meeting their objectives, but also on the number of investment options available. Many 403(b) plans still have far too many investment options for participants to effectively make decisions.  Education is a focus, since it is critical that participants make informed decisions, and plan sponsors are looking for consistency of messaging to participants.

Plan design

The third area is plan design. Over the past year or so, we have seen greater interest in automatic enrollment, QDIAs and auto-escalation as advisors have been meeting with nonprofit plan sponsors.  We’ve found nonprofit organizations that are usually paternalistic toward their employees have been reluctant to adopt automated plan provisions for fear of telling participants what to do.  Once they understand how they work and how they benefit employees, the adoption rate increases.  According to the Plan Sponsor Council of America 2016 403(b) Plan Survey, approximately 19% of 403(b) plans had adopted automated plan provisions.  In 2016 at Principal®, we saw nonprofit plans with automatic features increase by 17%.

While progress has been made, the new modern age of nonprofit retirement plans is arriving and there are still many nonprofit plans that need help. Advisors need to help them see the light.

Affiliation Disclosures

This document is intended to be educational in nature and is not intended to be taken as a recommendation.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

t17020606f1 – 2/2017