Retirement Planning

Do you remember September 29, 2008? It was the biggest one-day drop in stock market history, some 777 points on the New York Stock Exchange, and launched the global economy into the worst financial crisis since the Great Depression.

The nonprofit industry wasn’t spared, either. Three-year trending data from The NonProfit Times and Bluewater Nonprofit Solutions’ annual Nonprofit Organizations Salary and Benefits Report, exposed the picture: Employees of nonprofits backed off participating in retirement plans because they simply needed the money to pay their bills.

According to an ING report, if an executive had a non-qualified deferred compensation plan with a $1 million account balance that was aggressively invested in October 2008, by February 2009 the value of that account could have fallen to $600,000, or less.

Here in 2014, with the economy turning the corner somewhat, it might be time to catch up on retirement planning.

Thomas Lanning, tax partner in the Not-for-Profit Industry Practice at CohnReznick in New York City, first pointed to the obvious. “Employees of not-for-profits have to plan their retirement well in advance. The methods are what some of us consider the key elements of financial and retirement planning,” he said.

Those include using adequate budgeting, setting aside funds in IRAs, utilizing the maximums permitted under various plans such as the 403(b) and 401(k), negotiating for non-qualified compensation plans, avoiding credit card debt, getting substantial health care benefits and coverage, and other financial planning services.

The fact of the matter, said Lanning, is that nonprofit executives should be exploring ways to update the overall compensation package in a variety of ways. These include getting a bigger salary (especially if the leader has been with the organization for some length of time) and foregoing areas that are of little importance such as a parking space and time off. “Reduce it to money,” said Lanning.

Top executives don’t get stock options or grants that reside in the for-profit corporate world but they can negotiate packages that can result in large payouts at retirement. For example, Ronald Lagnado, partner in New York-based accounting and consulting firm Weiser Mazars LLP, said top leaders need “to review what was granted to others in the past. You can always ask.”

In addition, Lagnado advocated looking at competitive benefits, principally from the for-profit sector. “See what they have been doing and again, ask,” he said. “Can you get better vacation dollars, certain extended health plans, relocation or housing assistance, an occasional paid-for leave of absence, long-term care insurance that is also paid for, extra life insurance, perhaps some annuities? You need to look at this long-range based upon what you will need in dollars in retirement. Replacement ratios can range from 50 to 70 percent.”

Charles Tate, managing partner of Tate & Tryon in Washington, D.C., said that the key to catch-up is establishing the benefit amount. In other words, you need to look at how much the organization is willing to allocate to its total benefit package. “Once that is determined, the benefit arrangement would be structured in a manner that blends with the executive’s personal financial plan,” he said.


Adding on at the end

Many nonprofits have adopted Section 457(b) plans for their executives. These plans are for a select group of managers or highly compensated employees to allow them to defer additional compensation over and above what they can contribute to a 403(b) or 401(k), said Tate.

Suppose the executive wants to continue working a little longer and the organization concludes that it is in its best interests to provide a strong inducement for that executive to remain until a specified age or fixed number of years. That’s where a Section 457(b) plan might be useful for planning. The executive’s rights would vest immediately. The maximum eligible contribution to a Section 457(b) plan is only $17,500. The remaining contribution, after subtracting the Section 457(b) contribution, would go into the Section 457(f) plan under which the executive’s right to the accumulated payments, plus earnings thereon, would be subject to the person’s continued employment until a certain age (assumed to be age 70), or number of years, except in the event of death, disability, or termination of employment by the organization without cause.

According to Michael Monahan, principal-in-charge of Northeast CBC Practice, Grant Thornton LLP in New York City, while there are restrictions on some of the administrative practices that are available to nonprofit entities under these type of plans, they typically can serve to supplement the retirement benefits funded through the broader retirement plans such as 403(b) or 401(k).

Monahan suggested that executives take a hard look at any matching contributions. A survey conducted by Grant Thornton last year of more than 1,000 nonprofits across the U.S. indicated that some organizations are re-instituting a form of a matching arrangement in retirement vehicles.

Overall, the amount contributed to an employee’s pension by some nonprofit employers is less than 5 percent on average (4.8 percent), depending on organizational size. “Because of that economic downturn where a number of non­profits have either reduced or halted employee contributions, it becomes incumbent on the executive to bring this to the table so that any package more accurately reflects a combined effort by both the employee and the employer to plan financially for the executive’s retirement,” he said.

It is noteworthy to review an extensive study of the leadership requirements of nonprofits with revenues greater than $250,000 (excluding hospitals and institutions of higher education). The Bridgespan Group, with offices in Boston, New York City and San Francisco, found that during the next decade these organizations will need to attract and develop some 640,000 new senior managers — the equivalent of 2.4 times the number currently employed. In fact, according to the study organizations will require almost 80,000 new senior managers per year in the next two years.

The projected leadership deficit results from both constrained supply and increasing demand. The key factors include the growing number of nonprofits, the retirement of managers from the vast baby-boomer generation, the movement of existing nonprofit managers into different roles both within and outside the sector, and the growth in the size of nonprofits.

September of 2008 was a horrible time. September 2014 is looking better if planning is in place.  NPT

Stuart Kahan is a freelance writer in Long Beach, N.Y., and is the former executive editor at SourceMedia in New York City.