By Roy Hayhurst
Begin a new retirement plan with the end in mind.
Retirement. We all hope one day to do it. As church and ministry executives, you likely want to make sure you can offer your employees a competitive, robust retirement plan at a reasonable cost to your bottom line.
But how do you know if your current plan is on the right track, or, if you don’t have one yet, how to choose the right one?
“Establishing employee benefits is a very important consideration for any church or ministry and its employees,” says Dixie Beard, director of business development at GuideStone Financial Resources. “But before rushing into establishing an employee retirement plan, it is important to establish your ministry’s objectives, such as meeting your moral obligation to employees, evaluating your cultural environment and establishing cost parameters.”
Beard recommends ministries begin with the end in mind. “Establishing – and later managing – an employee retirement plan can be an overwhelming task,” Beard concedes. “You have to determine what an effective retirement plan looks like from your ministry’s perspective, while considering what one looks like from your employees’ perspectives. And you must have a trusted and experienced partner with expertise to assist you.”
Six key areas should be addressed from the employer’s perspective. The retirement plan should:
- Satisfy the ministry’s moral obligations
- Support the ministry’s fiduciary responsibilities
- Be cost-effective
- Attract, retain and reward staff
- Be flexible and easy to administer
- Be understood and appreciated by employees.
“It’s also important, from the employer’s perspective, that the service from the vendor is aligned with the church or ministry’s needs and values,” Beard says.
Before determining the type of retirement plan that best meets your ministry’s objectives, first explore the government regulations that would apply to your church. All retirement plans are subject to certain regulatory and fiduciary standards but some ministries, such as churches and church-related organizations, may have reduced governmental reporting requirements.
These plans are known as “Church Retirement Plans” and are not subject to the more cumbersome requirements of the Employee Retirement Income Security Act of 1974 (ERISA). For example, church plans are not required to file an annual Form 5500 or file a request for a Determination Letter from the IRS.
Having knowledgeable legal counsel and a retirement plan provider with plan administrative expertise is imperative in understanding whether your ministry is eligible to maintain a church plan, then developing and maintaining the right type of plan for your ministry so your goals for your organization and your employees can be attained.
Which is right for your ministry? Defined benefit plans? 403(b)? 401(k)? 401(a)?
It can be easy to get lost in the terminology. According to Beard, the two most common types of retirement plans fall into one of two categories: Defined benefit and defined contribution plans.
Defined benefit plans are sometimes referred to as pension plans. In this type of plan, the employer is obligated to pay a certain benefit at retirement based on a formula. The ministry funds the plan based on required funding standards. Employee contributions are generally not permitted. Since all investment decisions are made by the plan sponsor, the investment risk is borne completely by the plan sponsor.
Depending on whether the ministry is eligible to maintain a church retirement plan, these plans may be church plans or may be subject to ERISA.
Defined contribution plans include 403(b), 401(a) and the well-known 401(k). The employer or the employee (or both) can make contributions to the plan, but the employee generally bears all the risk and the responsibility for investment decisions. Retirement benefits are based on the participant’s account value at retirement.
Defined contribution plans may also be church plans or may be subject to ERISA. 403(b)(9) “Church” retirement plans are the most common type of plan utilized by churches and church-related ministries.
“Regardless of the plan chosen, all plans are subject to certain legal and fiduciary requirements,” Beard explains. “For example, regulations require that employers follow the plan provisions as outlined in the plan documents which means plan administration should align with plan features, contributions must be made on a timely basis and contribution limits must be monitored to ensure contributions don’t exceed legal limits.”
However, not all 403(b) retirement plans are created equal. For example, 403(b)(9) church retirement plans are exempt from Form 5500 filing and a Determination Letter is not required, but an employer-contributed 403(b)(7) plan generally requires both.
“Many ministries who have worked with a provider that isn’t well-versed in the intricacies of church retirement plans have found themselves in the wrong type of plan and are either inadvertently subjecting themselves to the requirements of ERISA or are not adhering to ERISA requirements that apply to them,” Beard says.
“Once the employer’s needs are well-defined, ministries should also consider what an effective program looks like from their employees’ perspective,” Beard says. Employees generally want a program that:
- Is easily understandable
- Offers online access to account information and education
- Provides a sufficient number of investment options
- Provides professional, personalized and courteous service
- Puts them in a position to retire with adequate income and with dignity.
“Having an adequate number of solid, diversified investment choices is a must for most employees,” says Beard. “Many churches and ministers also appreciate having Christian-based, socially screened investment options available to them. These types of options frequently screen out companies in which ministers may not want their money invested.”
Employees also want answers to their investment-related questions. Those questions can include how much they should
contribute, which investments they should invest in and how to make sure they’re on track with their retirement goals.
“Additionally, ministers for tax purposes may be eligible to claim part or all of their retirement distributions as a tax-free housing allowance if they reside in a church plan,”
Beard says, “It’s imperative that a retirement plan provider for churches and other ministries is able to facilitate housing allowance on retirement distributions.”
Other than the financial stewardship of the organization, the top priority for establishing a retirement plan is to ensure that employees are able to retire successfully and with dignity.
“Since most ministers intend to continue to serve in retirement, a retirement plan can be a blessing for employees in that they are able to set aside money to self-fund their future ministry,” Beard says. “It can also be a blessing for ministries and churches as they seek to recruit, reward and retain employees who are dedicated to their ministry and its goals.”
Roy Hayhurst is editorial services manager at Dallas-based GuideStone Financial Resources. www.GuideStone.org