The Puritans required adulterers to wear a scarlet letter A as a penance for their wrongdoing. It was a visible symbol of misconduct meant to stigmatize the wearer and warn off others. For nonprofit organizations, a reputation lacking honesty, integrity, and transparency is a similar penance. It marks them as untrustworthy and limits their ability to successfully engage donors.

No longer is the word charity synonymous with virtue and integrity. Nonprofits beware. Comply, or wear a scarlet letter for lacking the ethical principles and accountability engrained in true nonprofit transparency.

Trust Issues

There is a thread that exists between transparency and profit, and that delicate strand is made of trust. Unfortunately, scandals around the mismanagement of donors’ gifts—including bloated executive salaries, board mismanagement, corruption, and massive amounts of money paid out to third-party fundraising outfits—have left today’s donors questioning the authenticity of benevolent organizations.

“When an endowment or a foundation is less than forthright, it puts a blemish on the entire nonprofit community,” says Eric Bailey, head of the endowments and foundations practice at CAPTRUST. “Sometimes it’s out-and-out fraud. Other times, it’s a lack of leadership, misalignment, or lack of mission. Nonetheless, it’s damaging.”

According to the give.org “Donor Trust Report,” 32 percent of respondents trust charities less today than they did five years ago. And 73 percent of respondents to a separate survey rated the importance of trust as nine or 10 on a 10-point scale, with only 20 percent of those respondents indicating a high level of trust in charities.

Further, about a third of Americans don’t trust charities to spend their money well, and more than 60 percent of people around the globe say they don’t have faith that nonprofits can accomplish their missions, Fast Company reports. 

The public has higher expectations for organizations whose missions are to do good. “Today, people want to know more about a nonprofit’s mission, its goals, its impact, and the outcomes produced. Donors want access to detailed financial reporting, too,” says Bailey.

The fact is, donors are doing their homework before making gifts. And, according to data from The NonProfit Times, if a nonprofit organization doesn’t live up to a certain standard of transparency, it receives 47 percent less in contributions than organizations that proactively provide data to the public.

“By committing your agency to a donor bill of rights, those donors have the opportunity for transparency,” says Kristye Brackett, vice president of philanthropy at Transitions LifeCare.

Created by the Association of Fundraising Professionals, the Association for Healthcare Philanthropy, the Council for Advancement and Support of Education, and the Giving Institute: Leading Consultants to Non-Profits, the Donor Bill of Rights assures that a nonprofit organization deserves the respect and trust of the general public, and that donors and prospective donors can have confidence in the charities and causes they support.

“[At Transitions LifeCare], we are constantly having conversations about what does the donor bill of rights look like, and what are we doing to really adhere to that donor bill of rights,” says Brackett.

The More You Give, the More You Get

Don’t give donors reason to distrust your organization. Safeguard against this by making your organization’s financials easy for the public to find.

Nonprofits that are more transparent and share things publicly, like audited financial reporting, goals, strategies, capabilities, and metrics demonstrating progress and results, received 53 percent more in contributions compared with organizations that are less transparent. This is also according to The NonProfit Times.

A separate study published by the Journal of Accounting, Auditing & Finance, titled “Determinants and Consequences of Nonprofit Transparency,” hypothesized and found to be true that the decision to be transparent equates greater future contributions.

“When an organization provides insight into how donations are used, it adds depth and breadth to the mission that could not be gained in any other way,” says Bailey. 

Current reporting provided by nonprofits detailing how donations are being used is expected to stay about the same or increase over the next five years. As shown in Figure One, however, donors are most interested in hearing about program outcomes (88 percent) and impact stories (41 percent).

Figure One: What Areas of Nonprofits Are Donors Interested in Learning About?

A bar chart showing the number of people who use social media.

Source: “Foundation Reporting Study,” Social Solutions, 2019

Make Your Impact Known

Donors are motivated to understand who, where, and what their charitable gifts will support. Understanding how an organization demonstrates its impact is important to donors. In other words, they want to know who a nonprofit is helping, how the organization is helping them, and exactly how their gift was used. 

“We know savvy people are doing their due diligence before they come to the table,” says Brackett. “Donors expect to see low administrative costs per dollar raised, with the greatest impact going back to service needs.”

As shown in Figure Two, 98 percent of donors ranked impact as the most important factor when considering making a charitable donation, followed by mission (49 percent) and legal nonprofit status (37 percent).

“In every donor conversation, we tie it back to what their dollar is impacting in the service line. We do that in not only our larger gift asks but also in our annual appeals and our thank-you notes. And we hold to the standard that the [IRS Form] 990 reflects back on that. It is spelled out in all of our materials,” says Brackett.

Figure Two: Impact Is the Most Important Consideration Among Donors

A bar chart showing the percentage of people who use social media.

Big Brother is Watching

Fortunately for donors, there are watchdog organizations like the Better Business Bureau Wise Giving Alliance, the American Institute of Philanthropy, CharityWatch, and GuideStar, whose goal is to help inform donors by grading, monitoring, and measuring how donations flow into and out of nonprofits in relation to the goal they report. These organizations are in the business of advancing nonprofit transparency by gathering, organizing, and distributing information about U.S. nonprofits. Donors leverage these organizations to help them consider various aspects of a nonprofit’s transparency. 

Leading by example direct relief.

In a report examining if the GuideStar Seal of Transparency had an effect on fundraising, organizations with the seal were shown to be more likely to receive donations than those that had only claimed their profiles and opted to receive contributions through GuideStar. And 78 percent of the organizations that received a donation through GuideStar’s website last year were seal holders.

Depending on how much information a nonprofit provides in its GuideStar profile, the organization is identified by a specific seal that indicates its level of commitment to transparency. There are four levels; the more information provided, the higher the level Seal of Transparency awarded.

Bronze is for basic information, silver indicates full financial information has been shared, and gold means that the organization has shared all of these plus its goals and strategy. Finally, the highest seal is platinum, which indicates everything aforementioned, in addition to proven progress and results.

“Having that GuideStar Platinum Seal of Transparency is something each endowment or foundation should strive for. Donors are definitely reassured by it,” says Bailey.

Which seal an organization earns is incredibly important to potential donors. GuideStar reports that, in general, profiles with gold or platinum seals receive twice the views of other profiles. And the average donation for gold and platinum seal holders is roughly 11 percent higher than the combined average donation for non-seal holders or organizations with bronze and silver seals. Additionally, the combined average donation for all seal holders was 7 percent higher than that for non-seal holders.

Transparency Drives Traction

Charitable organizations are not powerless in shaping public perceptions about the nonprofit sector. Luckily, the dynamic nature of trust suggests the third sector can make changes that positively impact public opinion.

Transparency is not just about releasing a box of documents for public consumption. It can be a real tool for nonprofits to increase their impact through more accurate self-assessments and public engagement, leading to increased donations, more volunteers, and more positive press.

Another key piece to understand: Transparency is not a one-size-fits-all equation. What is comfortable for one organization may not be comfortable, realistic, or appropriate for another. The best transparency policy will be one guided by an organization’s mission, catered to its supporters and potential supporters, and considerate of the organization’s needs, policies, and legal issues.

“Establish great mission work that’s held accountable back to philanthropic investments. Rely on that philanthropic investment as an up-lifter of your mission and treat it very seriously,” shares Brackett. “And with that treatment and transparency, there will be more. People want to give. They are generous.”

But, with only four holes to go, Scott played disastrously, ultimately losing to Ernie Els by a single stroke in what is widely considered one of the greatest chokes in professional sports history.

The loss had a profound effect on Scott. With his confidence wounded, he began playing much more cautiously. In subsequent tournaments, he fell further and further behind, even finishing 45th at the World Golf Championships.

He hadn’t lost his skill, of course, but he stopped taking the necessary amount of risk that was required to push ahead of the pack.

The Snake-Bite Effect

Losing confidence and making overly conservative decisions in the wake of a negative experience is common and normal. Psychologists call this the snake-bite effect, and it’s deeply rooted in human evolution. Before venom antidotes were invented, a knee-jerk and overly cautious reaction was an important survival instinct.

But it may not serve us well in modern times, when unnecessarily cautious decision-making can stifle our experiences and opportunities for success. For instance, someone who gave up flying after just one turbulent flight would have limited chances to see the world.

Similarly, someone who refused to invest in technology stocks in the decade after the dot-com bubble burst would have missed out on the best-performing sector, thereby limiting their portfolio’s growth. 

“The hard part about cognitive biases is that they are often unconscious and automatic,” says CAPTRUST Chief Investment Officer Mike Vogelzang. “To make prudent decisions, we have to retrain our thinking to mitigate these knee-jerk responses and be more thoughtful instead.”

Automatic Thinking

The snake-bite effect is a combination of two emotional responses: recency bias and loss aversion. Recency bias weights our decisions more heavily toward events of the recent past, while loss aversion, simply put, is the idea that people hate losing about twice as much as they like winning. Psychologist Daniel Kahneman, who coined the term, said that people feel the negative impact of a loss twice as deeply as they feel the positive impact of an equal gain. This makes people avoid losing by avoiding risk.

Put recency bias and loss aversion together and investors are primed to be overly cautious following a market downturn, such as the one experienced in 2022, or an unexpected banking event, like the one the country witnessed in March 2023.

But this type of thinking could cause investors to miss out on opportunities for growth and potentially hinder their ability to achieve long-term financial goals.

Usually, cognitive biases are buried deep in our mental mapping—a legacy from our cave-dwelling days when quick decisions and mental shortcuts could mean the difference between survival and extinction. While useful in a historic context, these biases create more problems than solutions when it comes to successful investing. Nevertheless, academic research repeatedly shows that they impact our financial decisions regardless of investment experience, age, employment history, or net worth.

Homo Economicus vs. Real People

Economic models are built on the assumption that Homo economicus—that is, the average person—will absolutely always act rationally and make decisions based on perfect information, not emotion or past experience.

Do you know anyone like that? Probably not.

In fact, Homo economicus doesn’t exist. It is merely a stylized representation of how investors should make decisions. And when we base economic models around this theoretical person, we are ignoring the behavior of real people, who almost always allow past experiences to influence future decisions.

Homo economicus is immune to the snake-bite effect—and hundreds of other behavioral biases. But the rest of us are not.

“I see the snake-bite effect most often when establishing an initial risk tolerance with a client,” says CAPTRUST Senior Director and Portfolio Manager Jim Underwood. “If a person is beginning their investment journey in the depths of a bear market, they are much more likely to enter cautiously, just when the market is most likely to reward those who take risks.”

Underwood says snake-bitten investors can be overly concerned about the potential for short-term corrections and therefore lose sight of the long-term potential wealth generation that comes from compound growth in stocks. “This bias could permanently lower the investor’s long-term wealth ceiling,” he says.  

This is a critical point. While short-term investment results are somewhat random, the probability of compounding wealth in stock investments is skewed heavily in our favor if we stay invested for at least five years.

In fact, when we look at probabilities of investment success, using the S&P 500 Index as a measure, we find that trailing one-year returns have been down only a handful of times. Five-year returns have been down even less. And if we zoom out to investigate the 15-year trailing average, the S&P 500 has never been down in its history: a reminder of why time in the market is better than timing the market.

Winning the Game

Although we cannot change our past experiences, we can take actions today to overcome biases like the snake-bite effect and make better investment decisions.

One effective method is to keep a record of your major investment decisions, including rationales. By tracking the investment’s performance and your reasons for choosing that investment, you can learn to separate emotion from investing.

Remember: Every asset class goes through periods of poor performance and periods of great performance. Don’t let one bad experience limit your investment options.

Diversification is also a powerful tool. Creating a portfolio that contains assets from many different classes, industries, and geographies can help reduce the impact of negative events in any one area. While a diversified portfolio will never perform as well as the best-performing sector, more important for long-term investors is that it will likely never decline as much as the worst-performing sector. 

Another antidote to the snake-bite effect is staying focused on your long-term investment goals by sticking to your personal financial plan. Financial markets move around, sometimes in unexpected and extreme ways, but a financial plan can provide comfort during those uncertain periods and help you stay focused on future goals.

Finally, you can get outside help, which is what Adam Scott did. Within a few months of his British Open meltdown, Scott began working with a sports psychologist on the mental aspect of his game. That work paid off when, less than a year later, he became the first Australian to win the tournament in a dramatic playoff.

When it comes to financial issues, we often find ourselves in the role of money coach for clients. As Vogelzang says, “It’s the advisor’s responsibility—and often, the advisor’s highest calling—to help clients manage emotional reactions and stay focused on long-term goals.” Blunting a client’s worst instincts, however they’ve been formed, and helping them avoid impulsive mistakes is one of the most important ways advisors can add value.

Unlike Homo economicus, no real person is immune from emotional biases like the snake-bite effect. As Warren Buffet said, “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Using the tips above will help you avoid the negative implications of the snake-bite effect. It can also help improve the odds of winning your personal version of the game, whatever that may be.

The U.S. is one of only two industrialized nations that separate the government’s ability to spend from its ability to borrow (the other is Denmark). In 1917, Congress instituted a maximum debt limit—often referred to as the debt ceiling—to protect the government and its citizens against a blank-check mentality that could lead to unbridled spending.

While the debt ceiling worked well as a fiscal balancing tool for nearly 100 years, it has recently become a point of contention.

What is clear is that the U.S. government has experienced unsustainable debt growth, accumulating debt far greater than what it earns in any given year. And, while most people agree that the government needs to bring its budget deficit under control, building consensus behind the best approach seems full of political potholes.

The result has been a series of emotional debt-ceiling showdowns and warnings that the country may soon default on its debt. While the past few days have brought signs of optimism, a solution remains elusive. However, it is worth noting that there is an enormous gap between reaching the debt ceiling and defaulting on our debts.

When will the Treasury’s coffers run out? Answering that question is not so easy. As Treasury Secretary Janet Yellen told Speaker of the House Kevin McCarthy, “It is impossible to predict with certainty the exact date when [the] Treasury will be unable to pay the government’s bills.”

But the truth is that the timing doesn’t matter. The core of the issue is that while a debt-ceiling resolution this week might delay the need to face debt problems, it does not solve the larger issue.

For a moment, let’s imagine what could happen if the debt ceiling is not raised in time. In that case, the U.S. Treasury would continue to collect tax revenue and, of course, roll over the nation’s existing debt, keeping total debt under the debt ceiling. But if access to new debt is cut off, the U.S.—like any other consumer—would be forced to reprioritize its expenses and find items to eliminate to ensure that costs do not exceed the collected revenue amounts.

We are confident that paying the interest on national debt and fulfilling Social Security obligations are at the top of the government’s priority list. These payments will be maintained, even if other, lower-priority programs are cut.

Consequently, even if the debt ceiling is not raised, the odds of default are exceedingly low. While this logic avoids a technical debt default by the federal government, it does nothing to provide job or income security for most federal employees.

But the U.S. does not need an actual default to undermine investor confidence. Following the first debt-ceiling tug-of-war in 2011, S&P Global Ratings downgraded U.S. government debt. It’s important to understand that this downgrade was not a reflection of the government’s true ability to service its debt, but rather a reflection of concerns about the government and its ability to service debt.

As former Federal Reserve Chair Alan Greenspan stated, “This is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that.” In other words, it is a matter of will.

The U.S. has the enormous privilege and responsibility of maintaining the reserve currency for most global trade. This brings an unrivaled level of stability to the U.S. economic landscape, insulating us from sudden swings in currency valuations—but exposing other countries to those same swings. As John Connolly, former U.S. Treasury Secretary under Richard Nixon, said in 1971 to his international counterparts, “The dollar is our currency and your problem.”

While losing this reserve status would require many more years of reckless federal spending behavior, the status is being targeted by our economic competitors and potential enemies. Any decline in confidence in the dollar or the government’s ability to service its debt adds fuel to this competitive fire.

With that in mind, should investors look for ways to reduce risk as the country approaches its debt-ceiling deadline?

There is no doubt that the market could experience heightened volatility as this debate intensifies and the media weighs in at an increasingly high pitch. However, this is not a short-term issue that can be solved by holding additional cash.

There are four key points to consider in deciding how to prepare.

  1. As a firm, we continue to hold U.S. Treasury bills, notes, and bonds and believe they represent the peak of credit quality and the basis for price discovery for all other fixed income assets.
  2. The U.S. Treasury will prioritize interest payments and continue to service the existing debt of the federal government.
  3. The noise surrounding the debt-ceiling debate may create some uncomfortable moments for investors, but these discomforts will most likely prove temporary.
  4. The global equity markets are not focused on the debt ceiling. Instead, they remain focused on interest rate levels, the Federal Reserve’s fight against inflation, and the chances of an economic recession.

Despite the sense of urgency that typically surrounds debt-ceiling conversations, this is not a problem that can be solved quickly. It is a longer-term challenge to the primacy of the U.S. in the global economic hierarchy. And solving it will require disciplined focus on behalf of the U.S. Treasury.

From an investment perspective, if the federal government does not begin to bring its total debt under control, then we expect to consider changes regarding how we and our investors should approach long-term asset allocation. But at this moment, the situation remains under study and review.

But one day in 2006, Niewolny looked out of his office window from a skyscraper with a view of Lake Michigan and said to himself, “There has to be more to life than this.” Despite his success, he felt empty inside. The thought occurred to him: “If I died today, so what?” He realized he wouldn’t leave a legacy that mattered.

During that period, which he calls the season of “smoldering discontent,” Niewolny reevaluated his life, searching for new passions and ways to give back. He used ideas outlined by Bob Buford in his book Halftime: Moving from Success to Significance. Buford founded the Halftime Institute, a nonprofit organization that helps successful men and women create new lives defined by joy, impact, and balance.

As part of his journey to creating a lasting legacy, Niewolny went on a church mission trip to Africa, where he saw people who had very little but were far happier than he was. When he came back, he and his wife decided to sell their boat, plane, several houses, and other luxuries that he thought would bring him joy and happiness but gave him more headaches than anything else.

The couple used some of the proceeds to start an orphanage in South Africa. “So much joy came out of that,” he says. “That was the first time I realized when I took the focus off myself and put the focus on others, I had incredible joy and balance in my life.”

Niewolny says the purpose and passion for the second half of his life is giving back to those in need and making a difference in other people’s lives. At 54, he’s chief executive officer of the Halftime Institute and author of the new book, Trade Up: How to Move from Just Making Money to Making a Difference.

Finding Purpose

Psychologists say many people hit the pause button at some point during their lives to search for a deeper meaning and purpose. Despite the stereotypes about midlife crises, this pause-and-reset can happen at any age, from a person’s early 20s to retirement, and beyond. And it can be a challenging phase to move through.

The good news is that reevaluation often leads to a better life. In fact, studies show that meaningful activities—things that demonstrate and develop your abilities while also making a positive difference to others—can contribute significantly to your overall sense of happiness.

But what role does money play in happiness? Additional research suggests that money correlates with satisfaction only up to a point. Beyond that threshold, the correlation falls apart, and additional income no longer means additional happiness, says Frank Farley, a psychologist with Temple University in Philadelphia and a former president of the American Psychological Association.

“If you’ve been doing the same gig for decades, and you are highly successful, you may want to ask yourself: ‘How many more money mountains are there to climb? How many successes do I need to chalk up?’ It may be time to look for new venues in your life,” Farley says. That’s where generosity comes in.

The G Factor

When reevaluating their life’s purpose, many folks decide they want to give back. “I have been studying human motivation for decades, and I’m often asked what is on the top of the list of great human motives,” says Farley. “I answer generosity, which I call the ‘G factor.’ Generosity—the giving instinct—is so profound.”

Janet Karzmark, a life coach in San Jose, California, echoes Farley’s point. Giving goes hand in hand with compassion, she says, and most people feel a strong sense of compassion for those in need.

Successful people who have been busy striving and accomplishing things for most of their lives may not have had time to explore the compassionate part of their personalities. But if they volunteer for a humanitarian crisis or get involved in other important causes, their lives feel more complete and more purposeful, she says.

“You don’t want to face your death and think, ‘Oh, I missed that part of my life. I never got around to that.’ You don’t want to face that regret,” says Karzmark.

Giving back or serving others doesn’t mean you have to quit your job though. There are plenty of ways to make a difference with only an hour or two a week. For instance, Niewolny says he knew an executive colleague who volunteered to rock newborn babies of drug-addicted parents and found great meaning and joy in that simple act.

Organizations like VolunteerMatch and Charity Navigator make it easier than ever to find volunteer opportunities in your local community.

For many people, using their time and talents in their own sphere of influence is key to finding personal significance. That was the case for Alan Smith, president and chief executive officer of Rockcliff Energy, an oil and gas company in Houston, Texas. For years, Smith says, “I was so busy that I felt like I was drowning.”

To change his trajectory, Smith carved out more time in his life by stepping off several charity and industry boards. He also decided to narrow his focus to helping only a few organizations and a few other people in his network reach their full potential.

Now, Smith is a mentor and serves on the board of directors for the Texas Hearing Institute, a nonprofit pediatric hearing loss organization that provides therapy, education, and support services to children and families affected by hearing loss.

This cause has a special place in his heart because one of his daughters was born deaf. However, after receiving cochlear implants and help from the center, she is now able to hear. “The center had a huge impact on her life,” Smith says. Working on their board is one of the ways he gives back.

For Smith, reevaluating his lifetime legacy meant reprioritizing and staying focused. “You have a finite amount of time on earth, and you’ve been given many gifts and talents,” he says. “It’s a matter of being more intentional and figuring out how you are going to use them.”

How to Restart

There are several ways to begin the journey toward finding your purpose and creating a legacy you are proud of, says Niewolny. First, he says, start with the end in mind.

To do that, Niewolny describes an exercise he calls “the 80th birthday party.” Here’s how it works. Imagine you’re having a big birthday party with all your friends and family in attendance. Using a microphone in the room, the guests will recap your role in their lives. Write down what you hope they’ll say.

Also, write down the answer to these questions:

Another approach is to ask yourself: If you were living a perfect life two years from now, what would that look like? Not what would you be doing, but what would it look like? Describe the scene in vivid detail.

For Niewolny, he wants his wife to flourish and for their marriage to be a priority. He wants his children to have high self-esteem. And he’d like everyone in his family to be in good health.

While it’s common for people to desire change, it’s difficult to shift the course of your legacy all on your own, says Niewolny. Some people benefit from an accountability partner, whether that means a certified life coach, spouse, mentor, friend, neighbor, or colleague. You might also consider multiple coaches.

Tell these people what you want from your life and let them hold you accountable for progress. “There is a reason why the best athletes in the world have coaches even though they may be at the top of their game,” says Niewolny. Coaches provide motivation and support when you need it most.

On a Mission

Figuring out your personal mission in life and acting on it can be life-changing, says Fielding Miller, CAPTRUST co-founder and chief executive officer. He speaks from experience.

During the first half of his life, Miller says he set a hectic pace, trying to raise a family, build a business, stay involved in the community, and maintain an active social life. “My time was overly weighted toward work. I was a complete workaholic,” he says.

Like Niewolny, at age 40, Miller discovered Halftime, which prompted him to reassess his values, aspirations, talents, and relationships. He started thinking about what he wanted for his family—and what he wanted from his own life. One idea from the book especially resonated with him: “What will I do about what I believe?”

The result of that period of introspection was “a total heart change, an epiphany moment,” Miller says. He reevaluated why he was working and reprioritized the things that matter most to him, focusing on his personal endgame—what would matter when his career was over.

It didn’t take long for this new mentality to bear fruit. Gradually, Miller says, he began to look at everything through a new lens. He made decisions and approached relationships differently.

“My personal mission is to live a life that is pleasing to God by being significant in the lives I touch,” Miller says. “I would like to be remembered for fulfilling my mission.”

And it’s never too late, or too early, to decide what that mission will be.

As nonprofit governance practices and policies have evolved, the adoption of board member term limits has varied widely among different organizations, sectors, and regions. However, in general, the percentage of nonprofits that utilize term limits has increased over time, according to BoardSource data. Although term limits can create challenges around succession planning and annual turnover, they can also be a helpful tool for improving board performance, increasing board diversity, and attracting new board members.

CAPTRUST’s 2022 Endowment & Foundation Survey showed that 59 percent of surveyed nonprofits have formal board member term limits in place. Interestingly, however, one-third of organizations (33.5 percent) reported having board member terms but no defined limit on consecutive years of service. The survey also showed that organizations with term limits are more likely to follow a broad range of governance best practices, from having a formal conflict-of-interest policy to engaging in fiduciary training.

According to the annual Leading with Intent study, the most common nonprofit term limit structure is two three-year terms. Many boards allow former members to rejoin after a one-year sabbatical.

Here, it’s worth noting that nonprofit governance practices, including board member term limits, are subject to the laws and regulations of the jurisdiction in which the nonprofit operates. Some states have regulations or guidelines regarding term limits for nonprofit boards, while others leave term limit policies to the discretion of the organization.

Limits Foster Strength

How do board members feel about term limits? “In one word, I’d say they feel relieved,” says Eric Bailey, endowment and foundation practice leader at CAPTRUST. “Of course, we all want to give our time and talents to make a positive difference in the world, but I don’t know of anyone who wants to be a permanent volunteer on a nonprofit board.”

By creating a sense of urgency and accountability, term limits often improve board performance and can reduce organizational anxieties about leadership turnover. “Almost everyone works better when they’re working under a deadline,” says CAPTRUST Principal and Financial Advisor Bill Altavilla. “When board members know their tenure will be limited, they may be more motivated to optimize their time, instead of letting responsibilities linger.”

This is something Altavilla has experienced firsthand, both as a financial advisor to endowments and foundations and as a board member of multiple nonprofit organizations. Altavilla says boards are sometimes concerned that term limits will disrupt established relationships and group dynamics. “And that’s true, of course, but usually term limits disrupt things in a good way,” he says.

“What I’ve seen is that when term limits do hit, the board is usually reinvigorated and refreshed,” says Altavilla. “People get excited, and they remember that change is good because it brings new perspectives and approaches.”

While continuity has its benefits, boards grow stronger not despite turnover but because of it, as new members infuse fresh energy, ideas, and perspectives. Term limits also offer a healthy way for the organization to rid itself of existing board members who are inactive, ineffectual, or misaligned.

For instance, Altavilla says, “I’ve seen a few cases in which the organization has given a board seat to a major donor but later realized the person was inhibiting their progress or was detrimental to the culture of the group. If there are no term limits in place and this person is donating a large amount of money, the board can feel indebted and therefore obligated to keep them involved. But when you have a normalized process in place with defined term limits, you can rely on the natural course of action to create predictable turnover.”

Term limits can also be used to increase board diversity. In fact, one study published in the Alabama Law Review showed a strongly negative correlation between incumbency and board diversity, suggesting that—even without a board member matrix or developed pipeline of diverse board members—term limits stimulate board diversity by opening the door to new talent. This can help prevent stagnation and ensure that the board is better able to represent the communities the nonprofit serves.

Turnover and Recruitment

Of course, term limits also pose challenges, especially when it comes to recruitment. Firm limits mean current board members must commit continued time and attention to recruitment efforts and succession planning. “Recruiting nonprofit board members is difficult, even in the best of times,” says Bailey.

Yet there is evidence that term limits can make it easier to attract new board members, since people are more likely to consider serving when they know the commitment will be limited. “There’s only so much energy you can give to an organization before you know you’re ready to move on,” says Bailey. “Typically, what board members want is to get involved, add some value, then rotate off at predictable intervals, leaving them with the time and energy to explore new endeavors.” In other words, for most board members, term limits are both appreciated and embraced.

Best practices suggest that boards should turn over no more than one-third of their board seats each year. Bailey and Altavilla say things are typically more complicated. “Term limits are wonderful when everything is operating normally,” Bailey says. “But if a quarter of your board is due to roll off because of term limits and then another quarter of the board members quit, either because of leadership or their jobs or just sheer coincidence, that’s a serious challenge. We saw this frequently during the pandemic.”

Altavilla agrees. He says one of the boards he serves on is now facing a similar dilemma. “Four of us came on the board all in one year,” he says. “And that’s the majority of our board. Now, we’re all supposed to roll off at the same time.” But this could create a tremendous lack of continuity and a gap in leadership for the organization.

To solve the problem, the organization passed a resolution offering these four board members the option to remain on the board for two additional years. Two members accepted the offer. “This at least buys us a little time to find and integrate qualified replacements,” says Altavilla. It’s not an ideal solution, he says, but recruiting candidates for unpaid board roles feels exceptionally difficult right now.

And finding volunteers who are interested in leadership is an even bigger challenge. “Lots of people want to participate on a board but don’t want to be in a leadership position,” Altavilla says. “So many boards end up playing musical chairs within their executive committees. Year after year, the same three or four people take turns being secretary, treasurer, vice chair, and chair.”

This leadership succession problem shows the challenge and complexity of selecting the right term length and limits. “If board terms are too short, new members won’t have enough time to grow into leadership positions,” says Bailey. “You want to make sure you can vet people appropriately and give them the chance to vet the organization. Otherwise, you basically need to tap someone immediately after they join the board and get them in the pipeline to become the board chair.”

Implementing or Revising Policies?

For endowment and foundation board members who are implementing term limits or revising their term limit policies, there are several considerations to keep in mind. First, it’s important to establish a clear and transparent process for implementation. Usually, this means amending the organization’s bylaws or governance policies to outline board term limits, name the specific criteria for reappointment, and define the process for succession planning. Next, be sure to clearly communicate the rationale for all term limit decisions.

Finally, it’s important to regularly evaluate how effective the organization’s term limit policies have been and adjust as necessary. As a best practice, boards should reevaluate their bylaws and term limits at least every five to seven years, or each time they address their strategic plans. “This helps ensure that board governance policies are working in alignment with the nonprofit’s strategic goals,” Altavilla says. It’s also a good idea to monitor the impact of term limits on board performance, diversity, and overall governance.

By implementing term limits thoughtfully and strategically, nonprofit leaders can harness the potential benefits of term limits while mitigating the potential downsides, leading to improved board performance and organizational effectiveness. In this way, board term limits can be a good governance tool to help the organization achieve its mission and demonstrate its values.

401(k) and 403(b) Fee Cases Continue

The flow of cases alleging fiduciary breaches through the overpayment of fees and the retention of underperforming investments in 401(k) and 403(b) plans continues but without significant new developments. Here are a few updates.

Use of Participant Account Forfeitures: New IRS Proposed Regulations

Many plans include a provision that if a plan participant terminates employment before being fully vested in their employer contributions, the nonvested portion will be forfeited. Participants are always fully vested in their own deferrals. It has been generally understood that forfeitures could be used to do any of the following:

Under the new proposed regulation:

The proposed regulation also includes a provision that defined benefit plan forfeitures cannot be used to reduce required employer contributions.

Fiduciaries should receive and review regular annualized reporting on plan forfeitures from their recordkeepers to monitor this issue.

No Good Deed Goes Unpunished: 1947 Pension Trust Creates $38 Million ERISA Liability

In 1947, Mary Chichester du Pont—one of America’s richest matriarchs and part of the DuPont chemical company—created an employee pension trust to support domestic employees and those who provided secretarial, accounting, or other assistance to du Pont family members. The trust was intended to pay an annual pension equal to 60 percent of wages to those with at least 10 years of service. Each family member with covered employees was defined as a qualified employer. The trust was funded with 50 shares of DuPont stock, which had grown to 112,772 shares in 1999, worth about $7.4 million at that time. The trust has current assets of about $2.7 million.

In 2015, two of Ms. du Pont’s grandchildren contended that their domestic employees are entitled to benefits under the trust, and a dispute arose. This brought into clear focus whether the 1947 arrangement falls under ERISA, which was passed in 1974. It does. There is no exception for programs that preexisted ERISA. In the years before the dispute arose, administrators and trustees received conflicting opinions on whether ERISA applied, but they took no action to resolve the issue.

As would be expected, the fallout of the court’s finding that ERISA applies is considerable. A recent decision finds:

Given the complexities, the judge has appointed a special master—an independent businessperson or lawyer—to hold the defendants’ feet to the fire and report back to the judge. The special master and all providers the special master hires will be paid by the plan fiduciaries, with an initial retainer of $100,000. Wright v. Elton Corporation (D. DE 2023).

This case is a good reminder that benefits provided by employers to employees may be covered by ERISA even if that is not immediately apparent. It is also a reminder that problems do not age well.

Oops! Board Action Alone Did Not Terminate Severance Plan

A company’s employee benefit program included a severance plan. With layoffs pending, the company decided to terminate its severance plan and eliminate those costs. Prior to the implementation of planned layoffs, the company’s board of directors adopted a resolution terminating the severance plan. Disappointed employees who had been laid off sued, claiming they were entitled to severance plan benefits.

The severance plan was set out in full in the company’s employee handbook, and the company clearly retained the right to eliminate benefits. However, the handbook also said that action by the human resources (HR) department was required to modify the handbook. The district court found that the board of directors’ resolution terminated the severance plan as an act of the company and denied benefits to the laid-off employees.

The court of appeals found that the board action alone was not enough to terminate the severance plan. As prescribed in the employee handbook, action by the HR department—in writing—was required. Not requiring HR department action would effectively delete that provision, which the district court was not permitted do. Messer v. Bristol Compressors International LLC (4th Cir. 2023).

DOL Weighs In on Supplemental Life Insurance: Evidence of Insurability

We have previously reported on situations in which employees intended to enroll in supplemental life insurance coverage but did not complete evidence of insurability (EOI) requirements. Then, upon the death of the insured, and to the surprise of survivors, coverage was denied even though premiums for the coverage had been paid. The insurer would typically return these premiums.

Following an investigation, the U.S. Department of Labor (DOL) announced a settlement with Prudential Insurance Company of America on denials of supplemental life insurance coverage due to lack of EOI. The investigation found that even though premiums were collected for extended periods, numerous claims were denied because EOI had not been provided. From 2017 to 2020, more than 200 claims were denied on this basis. The investigation also showed that premiums had been collected back as far as 2004, even though EOI was not in place.

According to the DOL’s settlement news release:

Plan sponsors should work with their insurers or other providers to confirm that appropriate processes are in place to avoid issues like these.

Beneficiary/Slayer Denied Retirement Plan Benefits

Most states have a so-called slayer statute, which prevents murderers from benefiting from their crimes. In a recent Oregon case, a provision of this type was applied—with a twist. Tracy Cloud was convicted by a jury of murdering her husband, Philip Cloud. Although Tracy claimed self-defense, the evidence did not support her case, and there were financial incentives for the murder.

Philip was an employee of Intel Corporation and participated in Intel’s retirement plans. Tracy was his beneficiary. Soon after Tracy was convicted, the executor of Philip’s estate filed a suit to prevent Tracy from receiving the benefits from Philip’s plan accounts, and rather to disburse those funds to the estate.

Tracy objected on the grounds that an appeal of her murder conviction is pending. The district court acknowledged that disposition of Philip’s retirement plan benefits would depend on the outcome of Tracy’s appeal and stayed, or suspended, the case until the appeal is decided. Munger v. Intel Corporation (D. OR 2023).

The income tax benefits offered by 529 plans make these plans attractive to parents (and others) who are saving for college or K-12 tuition. Qualified withdrawals from a 529 plan are tax free at the federal level, and some states also offer tax breaks to their residents. It’s important to evaluate the federal and state tax consequences of plan withdrawals and contributions before you invest in a 529 plan.

Federal Income Tax Treatment of Qualified Withdrawals

There are two types of 529 plans: savings plans and prepaid tuition plans. The federal income tax treatment of these plans is identical. Your contributions accumulate tax deferred, which means that you don’t pay income taxes on the earnings each year. Then, if you withdraw funds to pay the beneficiary’s qualified education expenses, the earnings portion of your withdrawal is free from federal income tax. This feature presents a significant opportunity to help you accumulate funds for college.

Qualified education expenses for 529 savings plans include the full cost of tuition, fees, room and board, books, equipment, and computers for college and graduate school, plus K-12 tuition expenses for enrollment at an elementary or secondary public, private, or religious school up to $10,000 per year.

Qualified education expenses for 529 prepaid tuition plans generally include tuition and fees for college only (not graduate school) at the colleges that participate in the plan.

State Income Tax Treatment of Qualified Withdrawals

States differ in the 529 plan tax benefits they offer to their residents. For example, some states may offer no tax benefits, while others may exempt earnings on qualified withdrawals from state income tax and/or offer a deduction for contributions. However, keep in mind that states may limit their tax benefits to individuals who participate in the in-state 529 plan.

You should look to your own state’s laws to determine the income tax treatment of contributions and withdrawals. In general, you won’t be required to pay income taxes to another state simply because you opened a 529 account in that state. But you’ll probably be taxed in your state of residency on the earnings distributed by your 529 plan if the withdrawal is not used to pay the beneficiary’s qualified education expenses.

529 account owners who are interested in making K-12 contributions or withdrawals should understand their state’s rules regarding how K-12 funds will be treated for tax purposes. States may not follow the federal tax treatment.

Income Tax Treatment of Nonqualified Withdrawals (Federal and State)

If you make a nonqualified withdrawal (i.e., one not used for qualified education expenses), the earnings portion of the distribution will usually be taxable on your federal (and probably state) income tax return in the year of the distribution. The earnings are usually taxed at the rate of the person who receives the distribution (known as the distributee). In most cases, the account owner will be the distributee. Some plans specify who the distributee is, while others may allow you (as the account owner) to determine the recipient of a nonqualified withdrawal.

You’ll also pay a federal 10-percent penalty on the earnings portion of the nonqualified withdrawal. There are a couple of exceptions, though. The penalty is generally waived if you terminate the 529 account because the beneficiary has died or become disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship. A state penalty may also apply.

Deducting Your Contributions to a 529 Plan

Unfortunately, you can’t claim a federal income tax deduction for your contributions to a 529 plan. Depending on where you live, though, you may qualify for a deduction on your state income tax return. A number of states offer a state income tax deduction for contributions to a 529 plan. Again, keep in mind that most states let you claim an income tax deduction on your state tax return only if you contribute to your own state’s 529 plan.

Many states that offer a deduction for contributions impose a deduction cap, or limitation, on the amount of the deduction. For example, if you contribute $10,000 to your child’s 529 plan this year, your state might allow you to deduct only $4,000 on your state income tax return. Check the details of your 529 plan and the tax laws of your state to learn whether your state imposes a deduction cap.

Also, if you’re planning to claim a state income tax deduction for your contributions, you should learn whether your state applies income recapture rules to 529 plans. Income recapture means that deductions allowed in one year may be required to be reported as taxable income if you make a nonqualified withdrawal from the 529 plan in a later year. Again, check the laws of your state for details.

Coordination with Coverdell Account and Education Tax Credits

You can fund a Coverdell education savings account and a 529 account in the same year for the same beneficiary without triggering a penalty.

You can also claim an education tax credit (American Opportunity credit or Lifetime Learning credit) in the same year you withdraw funds from a 529 plan to pay for qualified education expenses. But your 529 plan withdrawal will not be completely tax free on your federal income tax return if it’s used to cover the same education expenses that you are using to qualify for an education credit. When calculating the amount of your qualified education expenses for purposes of your 529 withdrawal, you’ll have to reduce your qualified expenses figure by any expenses used to compute the education tax credit.

Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10 percent federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.

Source: Broadridge Investor Communication Solutions, Inc.

Bill Hoover, chief financial officer at Hillcrest Convalescent Center in Durham, North Carolina, has always had an open-door policy. Twelve years ago, when he started at the company, that policy helped him get to know his colleagues and respond to their concerns. But as Hillcrest grew to nearly 500 employees, Hoover found it challenging to keep on top of all of his many responsibilities while maintaining the open-door policy that was so important to him.

Among the many responsibilities competing for Hoover’s time and attention was his responsibility to monitor the company’s 401(k). Although he never missed a meeting with his plan advisor, scheduling became increasingly difficult, and he found himself consistently agreeing with his advisor’s every recommendation. This made him wonder if there wasn’t a better way.

Hoover recognized how important it was for his team to lean on experts for guidance. He also wanted to win back some of his own time to focus on other aspects of the business. With those two things in mind, he decided to transition Hillcrest to a 3(38) investment management arrangement.

A 3(38) arrangement gets its name from the relevant Employee Retirement Income Security Act of 1974 (ERISA) section that defines it. In brief, a 3(38) arrangement is a way of outsourcing the burden of investment decision-making—and risk—to a qualified expert. 3(38) investment managers are a distinct breed of fiduciaries legally required to act in their clients’ best interests when it comes to choosing funds and managing assets. Their job is to select, monitor, and benchmark retirement plan investments on a discretionary basis. And they’re experts at doing so.

Smart Outsourcing

Investment advisors registered under the Investment Advisers Act of 1940 have long assumed this role for defined benefit pension plans. But increasingly, 3(38) relationships are being extended to defined contribution plans too, primarily 401(k)s and 403(b)s.

There is good reasoning behind this choice, says Jennifer Doss, senior director of CAPTRUST’s defined contribution practice. Doss says an uptick in litigation regarding defined contribution plans has led to increased industry demand for 3(38) relationships.

“A 3(38) arrangement represents the highest level of investment liability transfer possible under ERISA today,” says Doss. “It’s pretty easy to see why there’s demand in the industry for this kind of fiduciary.”

Benefits attorney Mark Grushkin agrees. He has seen many defined contribution plan committees receive materials for approval right before a meeting and then rubber stamp whatever they get from their investment advisor.

That’s partly because very few people have the requisite expertise to confidently make these investment decisions. “There may be one person—maybe the CEO—with some financial acumen,” Grushkin says. “But that doesn’t make them an expert in investing. And for those folks, I think [using a 3(38) is] really important.” With the “virtual explosion of ERISA litigation,” he’s noticed, “Why not offload as much fiduciary responsibility as possible?”

There’s also the appeal of unburdening overworked executives by having someone else manage plan investments. “If you’re a smaller partnership or mid-size enterprise, one of the things you value most is time,” says Scott Matheson, managing director of the institutional group at CAPTRUST. For example, the business officer at a school is not only making sure everyone’s benefits are in order but also running the line for carpool. “Reducing the amount of time spent on retirement plan meetings and follow-ups is a real, tangible benefit.” says Matheson.

The time savings was a big draw for Bill Hoover at Hillcrest. “We were a smaller company, and we liked to have control and have our hands in everything,” he says. “But as we started to grow, we realized we needed to focus on growth and put investment decisions in the hands of experts.”

Faster Changes, Better Outcomes

Smaller companies are happy to reclaim time, and larger companies are often glad to unload some of the risks that aren’t core to their businesses. But any size company is pleased when its investments achieve better outcomes.

“Committee members wear lots of hats, so getting all the decisionmakers in the same room can be difficult,” says John Leissner, CAPTRUST head of institutional client service and operations. “Considering the time needed to adequately discuss fund changes, the timeliness of these changes can pretty easily be negatively impacted.”

With a 3(38) arrangement, fund changes can happen more quickly. They no longer require companies to spend time scheduling and holding committee meetings or researching and debating proposed changes. And with quicker fund changes come compounding returns and better retirement results for employees, explains Leissner.

Reducing the expenses and logistics of plan committee meetings are additional benefits. Financial advisors at CAPTRUST have witnessed plan sponsors in a 3(38) capacity lowering company expenses by having fewer meetings. These meetings can quickly become expensive when accounting for travel costs, lost billable hours, and expert fees. One advisor reported that a plan sponsor was able to reduce its committee size from eight to two and switch from quarterly to semiannual meetings, thereby reducing costs significantly.

For many plan sponsors, committee meetings—previously filled with discussions about managing investments and selecting funds—have shifted. Now, they’re more focused on participant engagement, plan design, optimization of retirement plan vendor offerings, and the fiduciary process. Advisors have also witnessed plan sponsors with a 3(38) relationship being able to spend more time on participant financial wellness, retirement readiness, and overall plan satisfaction.

“The committee spends much less time talking about the individual investment options, freeing up time for more meaningful discussions about helping their employees build a solid retirement plan,” says one CAPTRUST advisor.

The Phew Factor

What’s the biggest motivator for plan sponsors to engage in a 3(38) arrangement? At first glance, it may seem like plan sponsors would want to reduce fiduciary risk. But surprisingly, many sponsors report that relief from worry was their major incentive.

“While we felt that plan sponsors would be relieved about taking on less risk as fiduciaries upon hiring a 3(38), we didn’t realize that this typically results in committee members experiencing less worry and stress related to plan decisions,” says Leissner. “We realized committee members actually felt emotionally relieved to not have to make these decisions.”

For Hoover, switching to 3(38) had just that effect. “The financial world is a crazy world out there, and unless you’re in it every day and know what you’re looking at, it can be overwhelming,” he says. “It takes a lot of weight off my shoulders and my business partners’ shoulders to know we can focus on our employees, on our business, on our growth, and know that experts are handling our 401(k).”

He’s certainly not alone. Doss says that some plan sponsors may not have fully understood the liability they were accepting in their prior 3(21) advisory arrangement—a relationship that allows a fiduciary to advise the committee but not execute decisions on its behalf. After working under a 3(21) arrangement for a period of time, a 3(38) arrangement felt much more appealing.

“A lot of committee members are very happy to relieve themselves of that responsibility, understanding they do not really have the requisite knowledge base,” Hoover says. Or as one CAPTRUST advisor explains it, the feeling his clients experience as part of a 3(38) arrangement could be called the phew factor: a sense of safety and relief.

Letting Go of the Reins

One of the primary reasons why companies might choose not to pursue a 3(38) arrangement: fear of giving up control. Often, plan sponsors say they’re comfortable where they are, often with a 3(21) relationship. Or they don’t feel comfortable handing over the reins to someone else. “Some folks want to stay involved in the decision-making process and don’t want to feel out of the loop or caught off guard by changes being made to the plan,” explains Doss.

Certainly, a 3(38) arrangement is not the right choice for every plan sponsor. For Grushkin, the benefits attorney, it comes down to the aptitude and availability of committee members. For CAPTRUST’s Matheson, it’s about culture. “If you’re an organization that likes to be involved in all the gory details, then don’t turn over the keys,” he says.

But surprisingly, even plan sponsors who were once hesitant to give up control said moving to a 3(38) arrangement did not leave them craving their old responsibilities. “They are not burdened with making difficult decisions, they have time for more dialogue about participant outcomes and plan competitiveness compared to peers in industry, and the fund change process is streamlined with minimal involvement,” says Leissner.

Given all those positives, and the draw on resources they had with previous arrangements, “It makes sense to us that the plan sponsor’s emotional ties to the process are something that they can let go of a little more quickly than they had anticipated,” he says.

Hoover was not disappointed when he switched to a 3(38) arrangement. The time saved, the risk transferred, and the improved outcomes all left him satisfied with his decision to make the change. In fact, Hoover says Hillcrest’s competitive 401(k) is a big selling point in the recruitment process, and one that gets used to attract top talent.

Hoover says the switch to a 3(38) relationship has been successful because it is something he doesn’t have to think about.

And, surprisingly for him, using a 3(38) has allowed him to focus his scarce time and attention on other pressing matters, like helping Hillcrest employees get in the plan and save enough for a comfortable retirement. “The fact that we have an advisor picking the funds for them, not only does it help me sleep better, but it takes away a negative,” he says. “There are much more important things for me to focus on.”

With confidence bolstered by a tight labor market and strong consumer spending, throughout the first quarter of 2023, the U.S. Federal Reserve continued to communicate a steadfast commitment to bring down inflation. This signaled to markets that interest rates are likely to move higher and stay high for longer, thereby increasing the risk of a policy-induced recession.

Meanwhile, fractures emerged within the U.S. banking system due, in part, to the speed and magnitude of rate hikes so far. These events hold the potential to dampen future growth if they lead to tighter lending conditions.

Nevertheless, equity investors seemed to shrug off these concerns in the first quarter. Stock markets have been surprisingly calm. The S&P 500 Index enjoyed its best January since 2019, while the tech-heavy Nasdaq Index posted its best start to the year since 2001. Despite the dramatic rise in interest rates and the banking scare, the S&P 500 is still trading at more than 18 times earnings.

But all is not quite so calm in the bond markets, where a significant disconnect has appeared. The Fed is still in tightening mode, worrying over persistent inflation, while the bond market is signaling concerns about economic slowdown and the risks of recession. This ongoing clash will likely be the key story throughout 2023, with consequences for both the markets and the economy.

Figure One: First Quarter Recap—A Glimmer of Good News

Investment Chart 1

Asset class returns are represented by the following indexes: Bloomberg U.S. Aggregate Bond Index (U.S. bonds), S&P 500 Index (U.S. large-cap stocks), Russell 2000® (U.S. small-cap stocks), MSCI EAFE Index (international developed market stocks), MSCI Emerging Market Index (emerging market stocks), Dow Jones U.S. Real Estate Index (real estate), and Bloomberg Commodity Index (commodities).

In stark contrast to last year’s losses, most major asset classes delivered positive returns for the quarter, led by international market stocks with high single-digit returns, aided by the weakening dollar. Within the U.S., the financial sector faced stiff headwinds and investors reacted to banking stress by rotating back to the comfort of mega-cap technology companies with fortress balance sheets and strong cash flows.

U.S. bonds also rebounded from last year’s painful losses, with a total return of 3 percent.

The standout performer of 2022, commodities were the only major asset class to experience negative returns, driven by declining energy prices fueled by fears that a slowing economy would reduce oil demand. The OPEC+ organization of oil-producing countries reacted by cutting production targets to raise prices. With U.S. shale production lagging due to higher financing costs and an uncertain regulatory environment, and with the Strategic Petroleum Reserve at its lowest level since the 1980s, the U.S. will now have fewer tools in its arsenal to rein in higher energy prices, which could contribute to lingering inflation.

Growth Conditions Persist

Global growth remained strong during the first quarter, providing bullish investors ample evidence of the potential for an economic soft landing. Consumers benefitted from a tight labor market and lower energy prices, while the pandemic reopening of China strengthened global growth conditions through higher domestic demand for goods and commodities. The rebound in U.S. and European purchasing managers’ index (PMI) survey data during the quarter also reflects improved global growth conditions.

Consumer purchasing power has also improved, as the prices of key items such as groceries and gasoline receded from their 2022 peaks. As shown in Figure Two, consumer sentiment—a key driver of consumer spending behavior—has also rebounded significantly from its all-time low in June 2022 as food and energy prices eased.

Figure Two: Consumer Sentiment and Food and Energy Prices (2022-2023)

Investment Chart 2

Source: Federal Reserve Bank of St. Louis

While savings rates have declined and credit card balances have grown, economists estimate that consumers still hold approximately $1 trillion of excess savings accumulated during the pandemic that can continue to fuel consumer spending. According to Federal Reserve data, overall household financial obligations, including debt, leases, property taxes, and rents, also remain low relative to levels of disposable personal income.

By driving wages higher, the robust labor market has also contributed to consumer confidence and spending. Although tight labor conditions may be a thorn in the Fed’s side as it seeks to control inflation, these conditions continue to support economic activity. Even so, workers have struggled to keep pace with rising prices. March 2023 was the 23rd consecutive month when wage growth failed to keep pace with inflation, a sign of weaker bargaining power among the workforce that may suggest less risk of a wage-price inflation spiral.

Mixed Progress on Inflation

The strength of the labor market provides room for the Fed to continue its aggressive inflation-fighting campaign. Since 1970, there has not been a recession with the unemployment rate at its current level of 3.5 percent. The Fed views price stability as a prerequisite for an economy that works for everyone, and over the past year, it has acted forcefully to attain this objective, raising the fed funds rate nine times from 0 to 4.75 percent.

The March Consumer Price Index (CPI) showed mixed results toward this objective. The combination of higher interest rates, tighter lending standards from banks, and consumer spending behavior brought headline inflation down to a year-over-year level of 5 percent. While this is still far above the Fed’s 2-percent target, it shows significant progress relative to the 9 percent level seen last summer.

Headline inflation encapsulates a wide range of goods and services, and its return to levels not seen in nearly two years is good news. However, as shown in Figure Three, another closely watched measure called core inflation increased slightly in March. By excluding some of the most volatile categories, such as energy and food, core inflation is considered by many as a more reliable indicator for predicting future inflation trends than headline inflation. If its downward progress stalls or levels out, this could be a sign of inflation that risks becoming entrenched.

Figure Three: Core vs. Headline Inflation (Mid-2019 to Present)

Investment Chart 3

Source: U.S. Bureau of Labor Statistics

A Banking Tremor (Not a Crisis)

In light of this combination—a strong labor market and sticky inflation—the Fed continues to signal that additional rate hikes lay ahead. Notes from its March meeting suggest that virtually all committee members expect the fed funds rate to rise to at least 5.1 percent, which would suggest at least one more rate hike at its May meeting, after which rates would likely remain steady through year-end. The Fed is reluctant to reverse course too soon, which could allow inflation to regain its footing.

It is often said that, when trying to fight inflation, the Fed raises rates until something breaks. Yet, in addition to managing inflation, the Fed is also charged with maintaining financial stability. The challenge of balancing these two objectives came into clear view throughout March, after a bank run led to the second largest bank failure in U.S. history. This was followed by a second collapse soon after.

The root cause of these isolated collapses goes back to the pandemic, when households were flush with cash and interest rates were extraordinarily low. Bank deposits swelled, so banks did what they always do: They looked for ways to earn money on those deposits. To earn a greater net interest margin—the difference between deposit rates and what the bank can earn on its securities and loan portfolio—they loaded up on bonds.

But, as interest rates rapidly rose, those bonds declined in value. At the same time, rising interest rates made alternatives to bank deposits, such as money market funds or Treasury bills, more attractive to bank clients. As depositors withdrew funds from banks to take advantage of higher yields, banks were forced to sell securities at a loss, negatively impacting bank capital levels and liquidity.

To keep these isolated cases from causing stress on the larger financial system, the Fed stepped in, providing liquidity to banks through a new program called the Bank Term Funding Program. In effect, the Fed was helping to address the very problem it created—acting as both the arsonist and the firefighter.

These bank failures were isolated and idiosyncratic, but stresses within the banking system represent a form of tightening financial conditions that will either make the Fed’s job easier or risk pushing the economy into recession. In the week following these regional bank failures, consumers withdrew more than $180 billion from small banks—the largest weekly deposit decline of the last 20 years. Declines in deposit balances could leave small and midsize banks vulnerable, leading to tighter lending conditions particularly for real estate and small business loans.

Earnings Pressures

Historically, recessions have always coincided with a decline in corporate earnings. According to FactSet, earnings for the S&P 500 companies fell by nearly 5 percent in the fourth quarter of 2022 and are expected to have fallen by another 6.8 percent in the first quarter of 2023. If FactSet’s estimate proves to be true, this would mark the largest decline in earnings since early 2020.

Corporate profit margins are under pressure on several fronts. Companies face rising labor and input costs, greater scrutiny of supply chains, rising inventories as pandemic-driven demand slows, and importantly, rising financing costs. For companies and industries calibrated to the extraordinarily low interest rates of the past decade, moving to more historically normal interest rate levels will be a difficult transition.

Debt Ceiling Drama

An important deadline looms in mid- to late summer: the need for Congress to raise the U.S. debt limit. The U.S. debt ceiling represents the cap on the amount of money that the Treasury can owe before it risks a default on its debt. Congress has raised the debt ceiling 78 times since 1960, typically without fanfare.

Not raising the debt limit and defaulting on U.S. obligations would have devastating economic implications. As Treasury Secretary Janet Yellen recently told lawmakers, global confidence in the U.S. government to reliably pay its bills is the cornerstone of what makes the U.S. economy the soundest and best in the world.

With such serious consequences, the debt ceiling problem is likely to be solved. However, given the high degree of political polarization and the tight margins between political parties in Congress, reaching an agreement could be difficult and holds the potential to inject volatility into markets. Outside the U.S., the geopolitical landscape also remains challenging, with no end in sight for the war in Ukraine, escalating tensions between the U.S. and China, and more recently, the leak of top-secret Pentagon documents that reveal intelligence on adversaries, competitors, and key partners.

The Fog of Data

As the Federal Reserve ponders the forward path of interest rates, it has reiterated its dependence on data to guide its course. In this especially unpredictable environment, investors cling to every piece of new data, examining each detail through the lens of the Fed to determine if it’s good or bad news.

For much of 2022, the market’s expectations and the Fed’s own projections were tightly aligned. However, the two began to diverge late in the year. The Fed continued to emphasize its higher-for-longer stance, while markets envisioned a faster pivot, sending rate expectations lower. This difference of opinion will likely be a key driver of market behavior for the remainder of 2023.

For investors, there are several key points to remember in this type of environment. First, don’t be lulled into complacency by the orderly returns we saw in the first quarter. While prices and valuations suggest that calm has been restored to markets, powerful forces are still at work, promising a suspenseful and eventful remainder of the year.

Also, in choppy, directionless markets, income from dividends or coupons becomes an even more important source of total return. For long-term investors, this is a reminder that being aware of the environment does not mean reacting to every headline that crosses the screen.

Plan sponsors have long understood that not all participants have the same needs when it comes to retirement planning. For example, a 28-year-old who earns $60,000 a year and is paying off student loan debt may be looking for different features than a 58-year-old who earns four times that amount and is preparing to retire. Yet only recently have plan sponsors gained access to tools that can help them personalize their offerings in ways that account for demographic differences beyond age and income. If thoughtfully and intentionally designed, it’s possible that employer-sponsored plans can narrow the gaps in financial wellness and retirement readiness across diverse populations.

Women and people of color, for instance, face multiple challenges in building retirement wealth, primarily because of income inequality. On average, women are paid 83 percent of what men are paid, hold only 32 percent of the wealth that men have accumulated, and receive 70 percent of what men receive in retirement income, according to the American Association of University Women.The data regarding Black and Latino workers is even more striking. In 2020, the New York Times reported that Black men are paid only 51 percent of what White men are paid, and the median savings for Black and Latino families is less than a third of what their White, non-Hispanic colleagues have saved. These numbers show little progress toward pay equality since the 1950s. Over time, pay disparities—along with higher debt, shorter job tenure, and less financial acumen—take a serious toll on retirement outcomes.

But this isn’t the only reason plan sponsors are reacting. Combined data from the Bureau of Labor Statistics shows that women and people of color now comprise more than 63 percent of the American workforce.The country is on track to have a majority minority population by 2044, meaning that most Americans will identify as racial and ethnic minorities or as more than one race.

Whether motivated by demographic changes or moral imperative, plan sponsors are starting to explore which plan design elements and employee benefits may be most helpful in shrinking retirement disparities. Updating plan designs to support diverse employees is one way employers can stay competitive.

Personalizing Plan Design

Reshaping retirement plans to account for diversity is part of the larger trend toward personalized retirement benefits. Employers are no longer solving for the average. They are customizing their retirement offerings to account for a wide range of individual differences. To get a grasp on what participants want, sponsors first need to understand their unique employee demographics and ask about individual participants’ financial needs.

“The first step is often a data-finding mission,” says Scott Matheson, head of the institutional business at CAPTRUST. Via surveys and listening sessions, employers can look for trends to understand “which demographic groups benefit most from current plan design, who is not participating, and why.”

“The next step is to explore whether there are plan design elements that may support higher participation and savings rates across diverse demographics,” says Matheson. If there are, it can help to put changes in order of importance, moving those with the greatest potential impact to the front of the line.

For instance, plan sponsors might conduct a pay equity analysis. In general, plan participation increases with income. Because women and people of color are paid less than their White male counterparts, they are also less likely to participate when offered a retirement plan. What’s key is understanding why. When asked, both Black and women professionals cite three primary reasons: lower pay, higher debt, and competing financial duties.6 A pay equity analysis can help employers gain a clearer picture of their internal income disparities and start to understand how these differences may be contributing to plan participation and savings rates.

Auto Features and Eligibility

Although the industry is still learning which specific plan design features are most helpful, a few have already proven to boost financial outcomes for diverse workers. The first is employer matching—a powerful motivator for participation across nearly all demographics. CAPTRUST Financial Advisor Steve Wilt names two more: “If you want to increase participation, adding automatic features and lowering eligibility requirements can make a difference.”

The data regarding automatic features is especially strong. According to a recent Vanguard study, automatic enrollment can increase participation by 30 percent or more. And, when they are automatically enrolled, nearly 75 percent of participants remain invested in the default fund three years later.Wilt points out that “auto-enrollment may be particularly important for low-income Black and Hispanic workers.” With voluntary enrollment, these individuals participate in a defined contribution plan at 35 and 36 percent respectively. However, Wilt says, “With auto-enrollment in place, participation jumps to 93 and 94 percent respectively. That’s an astounding increase that may make auto-enrollment more attractive.”

But automatic enrollment does not necessarily reduce disparities in savings rates. While White and Asian employees are more likely to override default deferral rates and choose a higher one, Black and Latino populations do not generally respond the same way. As Mattheson says, “The employer’s default enrollment rate has a significant impact here. When employees are enrolled at low rates—like 3 percent—they may assume that 3 percent is sanctioned by the company as a sufficient savings rate. This can lead to lower savings rates and less total savings over time.”

This is where automatic escalation can make a positive difference, raising deferral rates across the board. Automatic escalation means increasing each participant’s contribution rate by a small percentage every year until the employee reaches a specified maximum rate. Under the SECURE 2.0 Act, auto-enrollment and auto-escalation are required for most new retirement plans, but existing plans may also want to consider adding these features. Those who do should carefully consider their default enrollment rate and rate of increase.

Plan sponsors might also consider lowering eligibility requirements. “Exactly how to lower eligibility will be different for every sponsor,” Wilt says. “Some may choose to allow part-time and seasonal workers to participate, while others may shift to immediate eligibility or shorter vesting periods.” SECURE 2.0 makes a change here too, specifying that long-term, part-time employees are eligible for plan participation if they have worked for the company at least 500 hours in two consecutive years.

Financial Wellness Programs

Another way plan sponsors are supporting diversity and inclusion is by investing in financial wellness programs. Studies show that diverse professionals face higher hurdles in achieving financial wellness due to differences in financial acumen and opportunity. Debra Gates, a CAPTRUST manager of financial wellness and advice, says financial wellness programs help people make more prudent decisions. “So many people have never learned the basics of financial literacy or personal finance,” she says.

Also, in some cultures, talking about money can be taboo. Nevertheless, individuals must make financial decisions every day. “Having to make decisions with limited knowledge can cause anxiety and stress, especially when those decisions are directly connected to a person’s financial future, such as whether to put money away in an employer-sponsored retirement plan, start an emergency fund, or create a budget,” says Gates.

A financial wellness program that targets a diverse demographic can not only expand employees’ knowledge but also instill confidence. Done well, financial wellness programs teach employees how to employ critical thinking skills to weigh outcomes, or at least be comfortable enough to discuss their financial goals with a trusted advisor.

But customized content needs to be thoughtful and intentional, which will help plan sponsors avoid stereotypical and tone-deaf mistakes. “Otherwise, you risk alienating the same people you are trying to include by making uninformed and potentially offensive assumptions,” says Gates. One way to do this is to include diverse perspectives in the content creation process. For instance, tap Spanish-speaking employees to help not only translate but also interpret English content into authentic Spanish-language materials.

“Start by having a conversation,” says Gates. “Find out who is not participating in the plan, and then take the time to ask them why. The barrier might be as simple as ‘I don’t understand how to sign up,’ or ‘I don’t know what this jargon means.’ It is easy to assume that some employees are not interested in participating, but by digging little deeper, plans sponsors can really understand the underlying issues and do something about them.” To understand which financial topics employees want to learn about, plan sponsors might consider sending a survey that lists potential topics, including debt management, credit management, market basics, investment strategy, education savings, and combining 401(k)s from multiple former employers.

As a best practice, sponsors should be prepared to use multiple forms of communication to promote wellness services and events, like short videos, emails, in-person or virtual meetings, and webinars. Wellness and enrollment materials should be accessible in multiple languages and, when possible, delivered on-demand for employees to watch, read, or listen to on their own schedules. It is also a good idea to tie educational content to specific participant actions, like deferral changes and investment advice.

Gates attributes the recent increase in financial wellness programs to the shifting relationship between employer and employee. “Employees expect and believe that it is the responsibility of their employer to provide solutions for financial, physical, and mental well-being. The expectation of the employer’s responsibility goes so far beyond where it used to be pre-COVID-19,” she says. “People do want to be paid well, but they also want to know that they are valued and respected.”

In sum, although DEI as an institutional practice is ever evolving, and DEI trends may shift in response to changing social or institutional circumstances, it seems that the principles of diversity, equity, and inclusion are here to stay. Employers who were early adopters of DEI strategies are now learning how to align their retirement plans and employee benefit packages to their DEI missions. Specifically, they’re doing so via plan design features and financial wellness.

Those who started a bit later can learn from these peers to create more robust, effective, and efficient retirement plans—plans that not only meet the needs of the modern workforce but also work to improve disparities and narrow existing gaps in retirement outcomes. Along the way, they’re also learning how to listen and respond to employees. They’re demonstrating a long-term commitment to employee wellness and creating trust that will carry them into the future.