The United Methodist Church approved a plan to start a DB plan for its 25,000 U.S. pastors and lay workers, the Evanston, Illinois-based organization recently announced .
According to a New York Times report, the church appears to be the first sizable U.S. employer to embrace a DB plan in many years with the only other recent pension start-up known to regulators is a plan, created last year for the police and firefighters of Lighthouse Point, Florida (See S. Fla. Town Goes the DB Way ).
The church has about $12 billion in other types of retirement plans, putting it on the same level with big -plan sponsors like Bank of America and Dow Chemical. In fact, the Methodists’ new plan will cover about as many people as the one that R. J. Reynolds runs for its U.S. workforce.
The Methodists’ move comes at a time when many employers have either cut back or altogether abandoned their defined benefit pension as being prohibitively expensive and too stressful to administer because of complex laws and federal regulations (See EBRI: DB System In Jeopardy ). At the same time, defined-contribution plans are widely seen as simpler to set up and cheaper to offer.
As the Times reported pointed out, however, the church has several notable advantages in its ability to offer a DB plan:
- Churches are allowed to opt out of the federal pension-insurance program offered to the private sector by the Pension Benefit Guaranty Corporation. Those that do, like the United Methodists, are no longer required to follow the much-criticized federal pension rules while for-profit companies have no choice but to follow the law or close down their pension funds
- The church doesn’t have the often intense shareholder scrutiny facing public companies from investors who might see large sums piling up in a pension fund and complain that the money would have been better spent on business pursuits.
In any event, church officials are comfortable with their move. Their experience running a 401(k)-like plan left them unconvinced that DC programs are cheaper and simpler. They say that their defined-contribution plan has been an administrative nightmare, with volunteer workers in thousands of far-flung churches doing the payroll deductions and paperwork, according to their own systems and schedules.
“Every time the money gets transferred, or somebody transfers the wrong amount, or does it late, it’s just a mess,” Ron Gebhardtsbauer, a United Methodist pension trustee who is also the senior pension fellow of the American Academy of Actuaries, told the Times. “It was obvious that a defined-benefit plan would be easier to administer.”
Interestingly, the United Methodists’ existing retirement plan was also troubled by its own success. By 1999, the investments had reaped such big returns that some pastors could retire, withdraw their retirement balances, and buy annuities that paid better incomes than they would have earned by staying in the pulpit.
“We pushed them out the door,” Gebhardtsbauer said. “That was a mistake. Under a defined-benefit plan, you don’t waste that money. You don’t give too much away in some years.”
The church has decided to keep its defined-contribution plan, so that pastors can still have a chance at the big payouts the retirees got in 1999. But that plan will be scaled back so that it provides only about a quarter of a pastor’s total benefit in a typical year. The defined contribution component will allow participants to accumulate cash in a self-directed individual account at a rate of at least 3% of actual compensation annually. Rather, the DB component will provide the primary foundation using a final pay model. The two components will be funded by the church.
After the trustees agreed to propose a traditional pension plan, Woody Bedell, an official of the pension board, spent about a year and a half traveling to the denomination’s 63 regional conferences, which are the basic unit of governance, and explaining it to local officials and lay people.
“There was certainly negativity,” Bedell recalled for the Times. “All they thought about was: ‘This is another unfunded liability. You’re putting a greater financial strain on the conferences. Nobody else in the United States is doing this.’ “
He said he told skeptics that the only way to offer long-term financial security to pastors was to create a pension plan. “Otherwise you’re putting all the risk on the participant,” he said. “They’ve got everything to gain, but they’re also at the risk of losing.”
More information on the Methodists’ DB move is available at http://www.gbophb.org/index.html .