NP Times / Nonprofits Outpace Business In Pension Offerings

This story was researched and written by Paul Clolery and Patrice Flynn

NPT/Flynn Research study shows most nonprofits offer retirement plans

Employees at nonprofits are more likely to have pensions than their for-profit counterparts. And, there's a chance that the nonprofit offers a choice in retirement savings plans.

Those are among the results of a NonProfit Times/Flynn Research survey of 239 nonprofits across the country. According to the survey results, 87 percent of respondents to the survey reported that their organization sponsored some type of pension plan for employees, well above the national average of 50 percent for all entities, according to the U.S. Department of Labor (DOL).

The percent of respondents offering traditional defined benefit plans was 18 percent. An overwhelming majority, 94 percent of respondents, offered defined contribution plans, with 13 percent of respondents offering both defined benefit and contribution plans.

According to the survey results, 41 percent of the pension plans offered by respondents required mandatory employee participation while 57 percent offered voluntary participation. The remaining 2 percent had both mandatory and voluntary enrollment policies by virtue of an organization offering both defined benefit and contribution plans.

The executives reported that 79 percent of plans were fully funded in 2002, and 16 percent were underfunded. The remaining 5 percent of respondents did not answer the funding question.

The NPT 2003 Pension Survey was developed to collect detailed information on pension plan coverage in the nonprofit sector. A one-page survey was developed by Flynn Research of Harpers Ferry, W.V., to collect basic information on the incidence of pension plans among nonprofits, the types of plans offered, and selected characteristics of those plans.

Demographic information was also collected to identify organizational size, location, and primary activity. The survey was designed to collect baseline data in 2002 for possible replication in the future to monitor trends.

The universe of survey participants was The NonProfit Times subscribers during August, 2002. The survey was fielded electronically by The NonProfit Times. Respondents were asked to fax back the completed one-page survey. The data were edited to correct for response and logic errors.

Transcription errors were caught through a double data entry process. If an organization did not specify its primary purpose, imputations were made only if the name of the organization clearly identified its function. Information from 100 percent of respondents was suitable for use in the following statistical analysis.

Of the 239 nonprofits that completed the survey, 59 percent were organizations with annual revenue less than $5 million. One-quarter (27 percent) of respondents had revenue between $5 and $25 million, 4 percent between $25 million and $50 million, and 10 percent had annual revenue of more than $50 million.

The primary purpose of organizations surveyed ranged from social welfare (44 percent), to education (13 percent), health (13 percent), culture (5 percent), associations (5 percent), religion (4 percent), foundations (4 percent) and civic groups (1 percent), representing the wide spectrum of 501(c)(3) organizations in the United States. Every geographic region of the country was represented in the survey, with the largest concentration of respondents operating in California, New York, Minnesota, Illinois, District of Columbia, Virginia, and North Carolina.

The retirement plans

Of the surveyed nonprofits with pension plans in 2002, 18 percent sponsored traditional defined benefit plans. And, 13 percent of respondents sponsored both defined benefit and defined contribution plans. There is some overlap in the two statistics.

Respondents indicated that workers qualified to join the defined benefit plan after an average of 1.9 years of employment. According to the respondents, 92 percent of the plans are insured.

Defined contribution plans were offered by 94 percent of responding organizations, and 80 percent of these organizations make employer contributions.

On average, workers acquire full rights to employer contributions after 5.7 years, the range being from immediate to eight years to vest.

More than two-thirds of defined contribution plans were 403(b) plans, which were created specifically for public educational institutions and tax-exempt 501(c)(3) organizations, and 22 percent of plans were 401(k) plans. The remaining 10 percent of plans included 457, 457(b), and simple IRA plans.

Funding the plans

There are two common ways to finance pension plans: pay-as-you-go systems and funded systems. With pay-as-you-go (PAYG) pensions, pensioners are paid through contributions made by today's workers who, in turn, rely on future workers to keep the system afloat. The main risk associated with this type of financing is political, specifically, that Congress may change the level of pension benefits over time through the legislative process.

Funded pension systems, on the other hand, are paid for from savings that are invested in financial assets. The risk here is economic, whereby equities and bonds are subject to market forces. The bursting of the dot- com bubble in 2000 and the subsequent recession have reminded firms and workers of the powers of investment risk, largely ignored during the bull market of the 1990s.

Of respondents, 23 percent were PAYG systems, with 59 percent being funded systems. The remaining 17 percent did not indicate how the plans were financed. The survey further revealed that more than half of the pension plans offered by responding nonprofits are funded externally through a separate pension fund (55 percent) and one-quarter are funded internally through book reserves. Some 19 percent of respondents did not indicate the funding scheme for their pension plans.

Respondents were also asked about the types of funds included in their pension portfolio, which determines the election options of workers. The findings indicate that more than three-quarters of organizations included equities, 70 percent included bonds, and 39 percent included socially screened investment funds.

The latest trend in pension plan coverage is the cash balance plan in which employers establish an account containing a percentage of a worker's salary plus interest accrued each year. Upon separation with the firm, an employee receives either a lump sum or annuity payout. The employer assumes the investment risk of cash balance plans. More than one-third of respondents to the NPT 2003 Pension Survey offered cash balance plans in 2002.

Trending information

When comparing survey data to information from the federal government, trends suggest a decline in traditional pension plan coverage among tax-exempt organizations. Indeed, a snap-shot of coverage among subscribers to The NonProfit Times indicates a further shift away from defined benefit plans into defined contribution plans. In 2002, 18 percent of respondents offered traditional employer-sponsored retirement plans and 94 percent offered individual defined contribution plans.

According to the DOL, of the combined 730,031 nonprofit and for-profit entities with pension plans in 1998, eight percent offered defined benefit plans and 92 percent offered defined contribution plans. Industry break-outs reveal that 22,850 tax-exempt organizations offered pension plans in 1998, 26 percent of which sponsored defined benefit plans and 74 percent sponsored defined contribution plans.

In contrast, 32 percent of nonprofits provided defined benefit plans in 1993 and 68 percent provided defined contribution pension plans.

A second trend in national pension plan coverage is the growth in the number of underfunded defined benefit plans. The executive director of the Pension Benefit Guaranty Corporation (PBGC) reported to Congress on February 27, 2002, that the federal agency that insures traditional defined benefit pension plans could be forced to make up a shortfall of "at least $125 million" in the Enron Corporation's plan covering 20,000 people if Enron fails to survive. PBGC officials warned that this figure may be the tip of the iceberg if other troubled firms declare bankruptcy without sufficient funds to pay pensioners.

Indeed, in October of 2002, Delta Air Lines, the third-largest U.S. airline disclosed a pension fund deficit of between $700 million and $800 million. General Motors wrote off about $9.6 billion in assets in 2001 to cover a pension fund deficit.

While underfunding was not the primary focus of the NPT survey, the results reveal that a full 79 percent of nonprofit sector pension plans were fully funded in 2002, 16 percent were underfunded, and 5 percent did not respond.

A third trend is seen in recent events in the marketplace. A red flag is being raised about the amount of retirement income investors will derive from their defined contribution plans. Since the bursting of the dot com bubble on Wall Street in 2000, the onset of the recession in March, 2001, and the corporate accounting scandals of 2002, investors have learned -- experientially -- the personal risks associated with defined contribution plans.

In the United States, pension fund assets comprise more than 70 percent of gross domestic product, a non-trivial sum. The debate is ongoing as to the merits of defined benefit vs. contribution plans, pay-as-you-go vs. funded systems, and internal vs. external accounting schemes.