In the private sector, there's been a trend away from traditional defined benefit pension plans towards defined contribution plans, such as 401(k)s. Recently, this movement has begun to spill over into not-for-profit organizations.

Rather then offering just a defined benefit plan, some organizations provide their staff members with alternative plans and allow personnel to choose among them. Employees can be offered a training program to help them make informed choices. They may like defined contribution plans for these reasons: 
 

Control - Employees get to choose how their retirement funds are invested in a defined contribution plan by selecting among multiple options. 

Training Days

   To realize the benefits from adding a defined contribution plan, the new offering must be warmly accepted by employees. To help attain this outcome, a not-for-profit should hire an experienced adviser to explain tax and investment issues to employees. Participants who haven't handled their own accounts generally have numerous questions and concerns that require knowledgeable guidance from a respected outsider.
   To get true benefits from a plan, you must communicate to employees the basics of asset allocation, long-term performance, short-term volatility, and so on.
   Participants can be given the option of staying in the existing plan or transferring the present value of their accrued defined benefit money to a defined contribution account. Employees should be informed about how much of a pension they are likely to receive if they stay in the existing plan, versus the projected retirement income from a new plan - provided their investments match the results of past performance.


Stock market participation - Despite recent reverses, stocks have historically outperformed fixed-income investments over the long term. In a defined contribution plan, money can be invested in stock funds and ultimately may provide more retirement income than defined benefit plans, especially for younger, longer-term employees. 

Flexibility - Each employee in a defined contribution plan can design a different investment portfolio, with a desired combination of risk and potential rewards. The amount they contribute can also be adjusted to suit each participant's perception of current versus future needs. On the other hand, defined benefit plans take a "one-size-fits-all" approach to contributing and investing for participants.

Portability - Money that employees contribute to 401(k) plans is theirs, along with the earnings. In most cases, matching contributions from a not-for-profit employer are fully vested within a few years. In an era when relatively few employees stay at one job long enough to earn a pension, the ability to take a defined contribution account from one job to another is prized by participants.

Employers may like defined contribution plans for these reasons:

Improved benefits - Because they are desirable to employees, defined contribution plans may help attract and retain valued staff.

Cost - Compared with a traditional plan, a defined contribution plan may have lower administrative costs.

Less risk - When a not-for-profit shifts from a defined benefit to a defined contribution plan, the risk shifts from employer to employee. There are no benefit guarantees for participants. Instead, benefits are determined by contributions and the investment performance in each individual's account.

Menu Makeup

Investment performance has a tremendous impact on the long-term results in a defined contribution account so a not-for-profit should pay a great deal of attention to the investment options in the plan. A wide choice of vehicles may be appealing to some participants but threatening to others. And from your organization's standpoint, more choices may mean more administrative costs, too.

Often, a menu of 10 to 15 funds is optimal. The lineup should include a broad range of asset classes: Large and small-capitalization domestic equities, fixed-income securities, cash equivalents and international securities. Don't include more than one fund in each asset class to avoid confusing and overwhelming the participants. 

Not-for-profit organizations shouldn't assume that all employees have the ability or inclination to self-direct their defined contribution accounts. Therefore, a "default" option or options should be provided, in which the organization chooses a participant's investment mix. This default option should be balanced among the various asset classes mentioned above.

One approach: Have the portfolio assigned to the default option mirror the investment selections in the organization's defined benefit plan. Such an arrangement helps ensure that unsophisticated participants wind up with a prudent investment mix of stability and growth potential.

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