Case Study #3: A Non-Profit Maximizes it’s 401(k)
“For All the Children” is a non-profit educational entity headquartered in the Bay Area. They provide after school tutoring services for students in 3rd – 8th grade. Lisa May, the company’s founder, was a former Teach for America teacher and founded the non-profit when she was 38 years old.
When Lisa founded the non-profit, she had four employees all located in the Bay Area providing after school tutoring to about 100 students. After running a successful model for a decade, she landed a big grant from a tech company in the Bay Area that allowed her to scale to Austin, TX, Denver, CO, Indianapolis, IN and Charlotte NC.
She oversaw the company as it grew from a team of five to a team of 125 across these five locations. The company developed a stellar reputation not only with the communities and families they served, but also as an extremely inclusive workplace with supportive culture.
When the company started to scale, Lisa (age 48 now) had decided to simply use the same insurance company for her 401(k) plan as she used at an old employer. It seemed like an easy and safe landing while she had so much else on her plate. She decided to go with the standard 3% match (thanks to funds made available from the grant).
Things generally ran fairly smoothly, with a few small hiccups in the plan over the first two years. None of these things pushed revisiting the plan to the urgent status, but here are a few of For All the Childrens’ experiences:
- They found it hard to get in touch with anyone at the Insurance company if issues arose (and even harder to resolve small issues).
- They had several employees ask about offering low-cost index funds instead of the original mutual funds in the investment line-up. When the HR department inquired with the insurance company, they stated it was not possible to offer these funds because they are not approved offerings.
- Participation hovers at 65%. For All the Children would like to improve this number so more of their employees can be saving for retirement, but the insurance company does not offer any support or customization that would help enhance participation.
The biggest hiccup happened when Lisa learned her company did not pass the IRS discrimination tests at the end of the year. This sent about ten employees scrambling at the end of the year because they were disappointed they had to receive refunds so couldn’t save as much as they had planned to save.
It was important to Lisa to offer great benefits to her employees to honor the hard work they put in each and every day. When the discrimination testing issue happened, Lisa asked her new Director of HR to partner with her Director of Finance to come up with a better solution.
They reached out to Investors Asset Management (IAM) because they heard IAM specialized in retirement plans for non-profits and educational entities. They sent a few documents over and received a proposal from IAM. Here are the changes IAM could make to their plan:
- IAM ran the numbers and found for $5,500 a year, they could increase the matching contribution to be a “safe harbor” plan. This would allow them to pass the IRS tests in the future.
- IAM would provide customized employee onboarding specific to For All the Children to support an increase in enrollment numbers.
- IAM provides an investment line-up consisting exclusively of low-cost index funds and ETFs, with access to Target Risk model portfolios (hint: about 95% of participants opt into the Target Risk model portfolios rather than selecting individual funds from the line-up).
- They also analyzed the 408(b)2 document from their current plan and found their participants were paying over 2% in fees, which adds up to potentially tens of thousands of dollars for employees over the years in unnecessary expenses.
In the conversation, IAM also let For All the Children know they would be taking on the 3(38) liability for their company (which they didn’t even realize was on their plate, but now they would sleep better at night).
Based on their specific assets in the plan and number of employees, the all-in cost would also be about 1.00% - so, more services for less cost out of employee’s balances. In fact, this would save their employees over $25,000 in fees just the first year alone (and then each year after that).
After the transition and onboarding process, the employee participation rose to 90% and the company passed all discrimination testing in the future due to their Safe Harbor status. They were also extremely satisfied with IAM’s customer service and response time. In retrospect, For All the Children wished they had started with IAM at the beginning as they could have saved headaches and money but they are glad they made the switch now and can offer this benefit to their employees.