Employees at Private Nonprofits Get Protection From Federal Law

When Brenda McCauley was assigned to set up a retirement savings plan for Children’s National Medical Center in Washington, she let would-be providers know that they would have to put employees’ interests first.

In a letter inviting companies to submit proposals, she said the winning candidate would have to offer a wide array of investments and be prepared to discount its fees.

“We are responsible for assisting employees in helping to save for their retirement -- and making prudent decisions about the vehicles through which to do that,” said McCauley, benefits manager for the medical center. “We do not want to present our employees with bad choices.”

That attitude is standard among private, nonprofit firms that offer 403(b) plans -- tax-deferred saving vehicles similar to 401(k)s.

Unlike public school districts, which usually leave teachers on their own in picking 403(b) investments, hospitals, church groups, charities and colleges typically take pains to see that employees have a menu of sound options with reasonable fees.

That’s because private nonprofits come under the Employee Retirement Income Security Act, which requires them to ensure that retirement plans are managed in the best interest of workers.

Congress exempted school districts from the law on the grounds that the federal government should not impose employment rules on state and local government institutions.

Nothing prevents schools from acting like private employers and screening investment choices for their workers, said Carol Calhoun, a Bethesda, Md., employment lawyer. But they usually don’t.

The Internal Revenue Service has proposed revisions to the Tax Code that would require all employers -- including public school districts -- to take more responsibility for the savings plans. They would have to draft uniform standards for 403(b) investments.

The agency is expected to issue a final version of the regulation in June. If approved by Treasury Secretary John W. Snow, it is expected to take effect next year.