Retirement plan sponsors for nonprofits may not know if they fall under the jurisdiction of the Employee Retirement Income Security Act of 1974 (ERISA) or what their responsibilities are.

But even if a nonprofit plan doesn’t have to follow ERISA guidelines, all retirement plan sponsors should consider following ERISA, as doing so will help protect against litigation.

And for plan sponsors, the rise in frequency of fiduciary litigation has put a fine point on the need to follow the highest standards.1

How to manage fiduciary liability for nonprofit retirement plans

Generally, all employer-sponsored retirement plans, whether they’re nonprofit 403(b)s, for-profit 401(k)s, pensions, deferred compensation plans or profit-sharing plans, are covered under ERISA. The exceptions are governmental plans and plans offered by religious entities such as churches, synagogues or mosques.

These three actions can help protect a nonprofit organization as fiduciaries:

  1. Provide fiduciary training: Provide fiduciary training for “named fiduciaries” (the plan sponsor) and “themed fiduciaries” (members of the retirement plan committee that oversees the retirement plan). This will inform these parties of their fiduciary responsibilities, best practices, and the consequences and risks of not meeting fiduciary standards.
  1. Purchase fiduciary liability insurance policies (FLIPs): Fiduciary liability insurance is advisable for individuals who could be found responsible for fiduciary breaches. It can help protect fiduciaries against claims of mismanaging plan assets or bad investment decisions and negligence in handling plan records or selecting plan service providers. The rise in frequency of fiduciary litigation makes FLIPs critical as a backstop.
  1. Consult an experienced retirement plan advisor: An experienced fiduciary advisor can guide and protect against liabilities related to fiduciary lapses.

ERISA exemptions

Not every nonprofit needs to follow ERISA guidelines and some may prefer not to. As noted above, governmental plans — those sponsored by a state, county, or municipality or one of their agencies or schools — are exempt, as well as those sponsored by religious organizations.

Other non-governmental 403(b) plans may also be exempt from ERISA, but only if plan participation is voluntary and employer involvement is limited to the bare minimums of plan administration.

For example, non-exempt plans include those when the plan sponsor can’t process distributions; approve hardship distributions or loan requests; review qualified domestic relations order requests; authorize plan-to-plan transfers; or make any discretionary determinations regarding plan administration, such as selecting a third-party administrator (TPA) to perform these functions. Vendors must be willing to take on these responsibilities if the employer will not.

The advantages of non-ERISA plans

Despite the advantage of following ERISA best practices, there are advantages of being a non-ERISA plan, including the following:

  • The nonprofit does not have to provide a Summary Plan Description and quarterly and annual investment information to plan participants.
  • Non-ERISA plans do not need to file a Form 5500 or related schedules.
  • Since 403(b) plans are subject to Universal Availability requirements that mandate all employees are immediately eligible to participate (with a few minor exceptions), the plan does not have to conduct actual deferral percentage (ADP) testing. As a result, highly compensated employees can save as much as they want up to the legal limit without concerns for what non-HCEs save. This is also true for ERISA 403(b) plans.

Contact HUB to speak to a retirement specialist and learn more about HUB Retirement Services.

This content is for general information only and is not intended to provide investment, tax or legal advice or recommendations for any particular situation or type of retirement plan. Please consult with a financial, tax or legal advisor on your own particular circumstances before acting on anything referenced in this blog.

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1 Woodruff Sawyer, “Protecting Against the ERISA Litigation Surge,” December 14, 2021.