Art by Katherine Streeter

Michael Flahaven is a senior vice president for Hub International in the firm’s Midwest financial services practice.

Flahaven joined Hub in 2019 from the Standard, where he focused on middle-market corporate retirement plans. In his current role, Flahaven also manages the region’s retirement services team, coordinating their day-to-day responsibilities and encouraging their professional growth in the institutional consulting space. 

One area Flahaven has been focused on recently is the nonprofit marketplace, which he sees as an exciting developing corner of the institutional retirement plan consulting space. As he tells PLANADVISER, Hub’s retirement plan services team already has a number of clients in the nonprofit sector, and the company sees this as one of many areas with significant growth potential.

“The first thing to say about the nonprofit marketplace is that it has advanced by leaps and bounds in terms of catching up with the 401(k) space and all the best practices that have been implemented there,” Flahaven says. “For example, we have moved away from the days where every 403(b)-style plan was set up around purely individual annuity contracts with anywhere from 15 to 20 vendors being involved. Having said that, the nonprofit side is still playing catch up in a number of ways, and there is a lot of work that skilled institutional advisers can do to support these plan sponsors.”

Based on Flahaven’s experience, nonprofit employers, like their for-profit counterparts, understand he importance of having solid retirement benefits at a time when it is more difficult than ever to recruit and retain talent. In fact, as Flahaven sees it, there is even more pressure on nonprofits to deliver strong benefits, because their pay levels often lag those of for-profit employers. Anecdotally, Flahaven says, it seems like nonprofit workforces experience higher turnover, perhaps due to less competitive pay and more challenging work conditions that can burn people out.

“When you serve small and even larger nonprofit plan committees, you may notice that there is a lot of turnover in the key management positions,” Flahaven observes. “As you are working on improving plans over time, the turnover can be a bit frustrating. The best way to address this, like with a 401(k) plan, is to install a very solid process that does not depend on a single key manager or leader.”

As Flahaven covered in a recent blog post, ensuring that nonprofit plan sponsors understand their requirements and responsibilities under the Employee Retirement Income Security Act is critical.

“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,” Flahaven points out. “The exceptions are governmental plans and plans offered by religious entities such as churches, synagogues or mosques.”

Flahaven says it is important for advisers serving the latter group of non-ERISA plans to help them see the importance of establishing a prudent and effective plan management process. There may not be the same degree of potential fiduciary liability to address, but participant outcomes are going to be better if the plan is operated in an efficient, transparent and dependable manner.

According to Flahaven, there are a few actions advisers can take to help protect nonprofit organizations as fiduciaries. First is the provision of regular fiduciary training to the named fiduciaries and to any functional fiduciaries, such as the members of the retirement plan committee, should one be in place.

“This will inform these parties of their fiduciary responsibilities, best practices and the consequences and risks of not meeting fiduciary standards,” he says.

Next, seek to ensure that adequate fiduciary liability insurance policies are in place, assuming the plan sponsor is covered by ERISA.

“Fiduciary liability insurance is advisable for individuals who could be found responsible for fiduciary breaches,” Flahaven says. “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 coverage critical as a backstop.”

Flahaven says advisers entering this space should be very clear on when and how ERISA applies in the operation of retirement plans by nonprofits. It doesn’t happen often, he says, but it is not unheard of to come across a potential nonprofit client that mistakenly believes its plan is exempt from ERISA. 

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

Despite the benefits of following ERISA best practices, Flahaven says, there are also advantages to being a non-ERISA plan. A non-ERISA nonprofit does not have to provide a summary plan description and quarterly and annual investment information to plan participants, for example. Nor do non-ERISA plans 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 testing,” Flahaven adds. “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.”