Those that are attracted to the nonprofit sector tend to be a caring bunch. They are often paid under-market wages and work long hours, justified (by both ourselves and our employers) by the meaning we derive from our work and the good we are doing in the world. However, as much as we care, we ironically perpetuate inequality for those employed to do this good work. One key aspect of this phenomenon is how little grassroots nonprofits support employees in saving for retirement.
Although being without retirement savings takes longer to show its impact than more immediate benefits such as health insurance, saving for retirement is crucially important for well-being. The ability to work is a form of capital, often the most significant asset a person controls. In this way, for those who can work and are not wealthy, not saving is not simply missing an opportunity to build assets, but an actual reduction in one’s financial position. As one ages, one’s ability to work (labor capital) decreases. If this is not replaced with savings, one’s financial position is reduced.
When nonprofits do not offer retirement savings, they make it more difficult for employees to eventually stop working when necessitated by age, illness, or other reasons (having long and short-term disability benefits is also important for this). The important work of nonprofit employees ought to be rewarded with the ability to retire with dignity after a career of service.
This is especially important when grassroots nonprofits are staffed by people from the communities they serve. In these cases, providing retirement plans can be seen as part of the organization’s broader mission to empower and enrich its community. Take, for example, the director of a grassroots organization that supports parents of color. After running the organization for a handful of years, she eventually had to leave a job she loved to find higher-paying work with better benefits in order to support her own family. A lack of benefits leads to attrition, which ultimately hurts an organization’s ability to achieve its mission. Decision makers need to support living wages and the ability of staff to save for retirement.
The structure of government retirement programs reinforces the role of employers in facilitating retirement savings, so employers who neglect to set up employer-sponsored retirement plans (let alone incentivize and add to savings with matched contributions) put their employees at a distinct disadvantage. When employers set up retirement funds, staff can sock away up to $19,500 a year towards retirement in tax-advantaged accounts. Without an employer-sponsored retirement plan, staff must save on their own, typically through an Individual Retirement Account (IRA) that is capped at $6,000 per year. After this, they must resort to taxable savings, all without the guidance that typically accompanies work retirement plans.
In a 403(b), the nonprofit version of a 401(k) retirement account, employers deduct a certain portion of their employee’s paycheck and put it in an investment account. This amount of money is not subject to state or federal taxes, which is the central difference between a 403(b) and other forms of investing. (Income taxes are paid when money is withdrawn during retirement.) In the account, the contributions are typically used to purchase from a select offering of mutual funds which contain stocks and bonds. The employee assumes all of the risk of these investments, which are not guaranteed and can have significant swings in market value. For instance in February of 2020, the S&P 500 Index fell 30% in 22 days. If you had $10,000 in your account at the high, then at the low point, you would have had $7,000.
The upside also belongs to the employee. Adjusted for inflation, the historical average annual return of the S&P 500 is around 7%. If an employee during this period making $50,000 saved 15% of their income each year and made 7% annually, they would have almost $1.5M at the end of a 40-year career. At a withdrawal rate of 4%, they could pull about $60,000/year to live on. Compare that to saving the same amount in a bank account that theoretically kept up with inflation, the saver would have $300,000 to live on. Even if they drew this account down to zero over 35 years, they would have only $8,500/year to live on.
Nonprofits can offer the education and infrastructure needed for people to save for their futures. Retirement can seem abstract when it’s far away, but it is quite tangible when it comes time. These funds pay for a life-saving medicine, for a trip to explore one’s ancestral motherland, to buy presents for grandchildren, or to shop for vegetables at the farmer’s market.
All parties need to come together to create this reality.
Nonprofit employees, ask if your organization has a retirement plan. If not, ask what it would take to set one up.
Funders, many of you have excellent benefits packages more common in the philanthropic sector. Create funding that supports nonprofits in offering similar benefits. Oftentimes, organizations are wary of increasing staff salaries or providing benefits (like retirement matches) because when they survive off of one-year grants they have no way to ensure they can continue these perks the following year. You can support better benefits and wages at the organizations you fund through providing multi-year general operating dollars. Funding nonprofits’ operations (and not just programs) also enables nonprofits to have the back-office staff to set up and manage benefits like retirement plans. If you work with lots of small nonprofits, see how providing benefits can be pooled amongst grantees.
Finally, nonprofit employers: offer retirement plans. Many retirement plans can be cheap to set up and do help employees even if there is no match given. Facilitate conversations about the options available to employees as individuals. Consider education on personal finance as part of your professional development or ongoing offerings. And of course, give staff a living wage that pays them enough to save. If you can’t afford to do these things, talk to your funders about increasing your grant amounts. Don’t undervalue your work by writing grants that don’t fully cover the costs of your staff.
When a Seattle-based nonprofit began to offer a retirement plan, this was the first retirement plan many employees had encountered, and the first time they had thought about investing. Through offering retirement benefits, it radically increased the amount that employees saved. It also motivated employees to learn more about retirement and take charge of planning for their financial future As this example shows, with automatic enrollment and a default investment, an employee is not required to have a special interest in personal finance to plan for their future. They are simply investing within their tax-advantaged retirement plan each paycheck without having to think about it, much like we contribute to taxes automatically without having to budget for it. Likewise, compound interest works quietly in the background. In the foreground, employees can focus on their missions advancing liberation and sustenance in their communities.
April Nishimura, MBA, MA-sid is the director of capacity building at RVC, a board member of TREC and UUSC, and a certified coach. Her passion is unlocking the potential of leaders and organizations to act in accordance with their highest values.
Landon Tan, CFP® is a Certified Financial Planner™ with a background as a community organizer in the Queer community. He specializes in working with social justice-minded individuals beginning to understand and direct their financial lives.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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