Many groups are curbing their retirement benefits
Last year, the United Way of America, the umbrella group for 1,400 local United Ways, infused $2-million into its pension plan -- three times the amount it had put in three years earlier -- to ensure that it could fulfill its obligations to workers who retire in the future.
But even if the 180-person organization continues to put cash into its plan, it still might have to reduce pension benefits or make its workers start contributing their own money for retirement, officials in the organization say. And United Way of America is far from alone.
As fund-raising revenue continues to lag at many charities, and investment gains on pension assets remain elusive, many nonprofit groups are struggling to set aside money for future monthly payments or lump-sum distributions to retired workers. So pressing is the problem that some organizations are altering their entire approach to compensation and benefits -- converting traditional plans to ones that put the burden for retirement planning on workers rather than on employers.
“This is a time of tremendous turmoil in the pension world,” says Olivia S. Mitchell, a professor of insurance and risk management at the Wharton School of the University of Pennsylvania and executive director of its Pension Research Council. “Nonprofit organizations probably feel even more constraints than companies do because they can’t raise money as easily.”
Changes that employers make to their pensions could have lasting effects on thousands of nonprofit employees. As many as one in four workers in the nonprofit field is covered by traditional pensions, experts say, and reductions in pension coverage could leave many ill-prepared to set aside enough money for retirement.
Ending Traditional Arrangements
Pension-financing problems caused the Girl Scout Council of Greater St. Louis and the United Cerebral Palsy Association of Orange County, in California, to close their traditional plans last year. Financing issues also persuaded the March of Dimes, in White Plains, N.Y., to reduce the amount of money it will pay employees when they retire. The Marion Koogler McNay Art Museum, in San Antonio, Tex., also closed its plan last year but declined to speak with The Chronicle about why.
Moreover, traditional pensions at 130 public and private colleges and universities experienced financial problems last year, according to a forthcoming report by Moody’s Investors Service, a New York credit-rating company. Some institutions held 60 percent fewer assets in the pension plans than the federal government required them to have, according to Moody’s, forcing many groups to make large cash infusions to shore up the pension funds or to borrow money to pay retirement benefits.
During the late 1990s, when the stock market was booming and pension-plan assets were growing comfortably, many charities added no money to their traditional pension plans. But when both stock prices and interest rates began to fall, many organizations faced shortfalls, forcing them to infuse more cash into their pensions than they had budgeted.
The pension troubles persist, potentially forcing many nonprofit employees to face a shortage of retirement income, experts say. “There is a lot of concern that retirement plans that employees have to contribute to will not produce nearly as much benefit to them as traditional pensions do,” says Edwin Hustead, senior vice president of the Hay Group, a company in Philadelphia that advises nonprofit groups on employee benefits. “It’s possible that we will have a real retirement crisis in 10 or 20 years.”
But some charities with traditional pensions require their employees to contribute to their plans, helping the groups avoid the kind of financial problems that have plagued other nonprofit organizations. The Boy Scouts of America, in Irving, Tex., makes its workers contribute 1 percent of their salaries to its pension plan, and it contributes the same amount. The approach has helped “smooth the waters for us,” says Lisa B. Young, the group’s director of compensation and benefits.
Federal Debate
To help companies and nonprofit organizations cope with their pension woes, federal lawmakers recently proposed legislation that would allow employers to reduce the amount they need to set aside for future benefits. But the Bush administration opposes the idea, fearing that organizations might default on their pensions if they contribute too little money to them.
For nonprofit groups trying to retain a traditional pension, the financial burden can be considerable. Employers that offer traditional plans, known as defined-benefit pensions, take on the full cost and risk of saving for their employees and making guaranteed retirement payments to them. Employees who are covered by traditional pensions get a lump-sum distribution or monthly payments when they retire. The amount is based on their years of service and final salary.
The high costs and risks have contributed to a drastic decline in the number of traditional plans at nonprofit and for-profit groups, from 114,500 in 1985 to 32,500 in 2002, according to the latest data from the Pension Benefit Guaranty Corporation, the federal agency that insures traditional pensions. Separate figures for nonprofit groups alone are not available.
“If you don’t already have a traditional pension, you probably wouldn’t want to start one because they’re expensive and they’re complicated,” says Peter A. Tartikoff, chief financial officer of the American Cancer Society, in Atlanta, which has a traditional plan.
Stock-Market Losses
If employers don’t put enough money into their traditional pensions, they can run into problems quickly. As the stock market plummeted in 2000, two board members of the Girl Scout Council of Greater St. Louis -- both certified public accountants -- suggested that the group’s pension was damaging the local charity’s financial health, according to Theresa E. Loveless, the council’s CEO.
After a two-year study, the group closed the plan in October and distributed $3.5-million to 140 current and former employees. They had the option of cashing the check they received from the group or rolling it over into an Individual Retirement Account or the group’s 403(b) plan without incurring income taxes.
The change saved the organization at least $100,000 a year, Ms. Loveless says. The group now contributes about $80,000 a year -- 1 percent of its $8-million budget -- to employees’ 403(b) plans. (Only charities, public schools, and colleges may offer 403(b) plans, while any employer may offer a 401(k) plan. One difference between the two plans is that employers that offer a 403(b) are required by law to allow employees to receive their payout in an annuity.)
Saving money was only one reason the Girl Scouts chapter closed its traditional pension. It also did so, Ms. Loveless says, because the plan had become “outdated for today’s workplace.” Traditional pensions, she says, “are dinosaurs.”
Many compensation and benefits experts agree, saying that such plans lack flexibility.
While 401(k) and 403(b) plans allow nonprofit employees to move their money to similar plans at other employers, traditional plans do not, says Mr. Hustead, of the Hay Group. In fact, when an employee covered by a traditional plan leaves an organization, the worker’s pension money stays with the employer, and the benefit eventually due the employee does not increase over time.
What’s more, Mr. Hustead says, employees who move from job to job often find traditional pensions unappealing because such plans pay most to workers who stay at one employer for their entire careers.
To most employees, Mr. Hustead declares, pension plans “are just some vague promise that might never pay off. Seeing an account statement grow is far more appealing.”
Employee Reaction
When given the choice, employees at the Girl Scout Council of Greater St. Louis preferred to have a 403(b) plan rather than the traditional pension, Ms. Loveless says. Two employees in the organization who spoke with The Chronicle agreed.
“At first I was apprehensive. I went home and said to my husband, ‘Oh my gosh, I won’t have any money or anybody looking out for me,’” says Barbara J. Lewis, 57, an administrative assistant who has worked at the organization for 25 years. “Then I realized that the new plan would allow me to gain control over my money and to do what I want with it.”
Terry Klein, 58, the group’s director of facilities and property, who has worked at the organization for four years, says that the traditional plan appealed little to him -- but he likes the new one.
“Before, no one knew how much money they were going to get -- it was a mystery,” he says. “Now, we see the money in our own accounts. And if we want, we can invest it in an annuity with a guaranteed return.”
Ms. Lewis says that she put about 80 percent of her traditional pension distribution into the 403(b) plan and cashed out 20 percent for home improvements -- paying a 10-percent tax penalty on the withdrawal because she is not yet 59Z\x years old, the age at which a person can avoid a penalty on retirement-plan withdrawals. Mr. Klein says he put his check into an Individual Retirement Account with a 2.2-percent fixed annual return.
Concerns About Costs
Like the Girl Scouts, the United Cerebral Palsy Association of Orange County closed its traditional pension plan largely because it cost too much to operate, says Paul F. Pulver, the group’s executive director.
“The cost of doing business has increased so much in the past five years, and revenues have not kept up,” Mr. Pulver says. “We just quite simply couldn’t afford to keep our pension plan.”
The plan paid out $540,000 to 54 people, Mr. Pulver says. With no more pension obligation, the group saves about $70,000 a year. In lieu of a traditional pension, the United Cerebral Palsy Association set up a 401(k) plan, contributing 50 cents for every dollar employees put in, up to 5 percent of their salaries.
Initially, employees did not like the change to the retirement plan, Mr. Pulver says. “Some people felt like we were taking something away, and there is some truth to that because we no longer guarantee their retirement payments,” he says. But, he says, he thinks employees need to save money for their own retirement.
“There are times in the nonprofit world where we feel like we don’t pay employees as much as corporations do, so pensions are one benefit we feel obligated to pay them,” he says. “I would rather be more competitive on salary and give employees the opportunity to control their investments.”
Officials of the March of Dimes say they too intend to raise employee salaries after recently making a significant change to the organization’s traditional pension plan, according to Kate Morrison, the group’s senior vice president for finance and administration.
After experiencing fund-raising declines and paying $16-million into its pension plan in the 2002 and 2003 fiscal years, the March of Dimes reduced the amount that employees will be guaranteed when they retire. It also added an annual 403(b) contribution of 50 cents for every dollar employees invest, up to 3 percent of their salaries.
Changing its pension formula saves the March of Dimes $900,000 a year, Ms. Morrison says.
“Our goal was to replace 70 percent of our career employees’ salaries because that is the general consensus about what people will need to live on when they retire,” Ms. Morrison says. “We feel a limited responsibility to help a person who only works for us for five years, but we feel more responsibility to help put long-term employees in a position to retire.”
Under its previous pension formula, Ms. Morrison says, the group tried to provide retired workers with 85 percent of their salaries.
Having both a traditional and a 403(b) plan keeps costs lower than if the group offered only a 403(b) plan, Ms. Morrison says, because the traditional plan helps to retain employees.
“The contribution we make to 403(b) plans is important to new employees because it helps them become involved in their retirement planning,” she says. “But our plan also treats people who stick with us a long time the best possible way with the least cost to the organization.”
One employee, Ellen L. Fiore, the group’s managing editor for science information, who has worked for the March of Dimes for 23 years, says she is grateful that the organization kept its traditional plan, but it is “obviously not as lucrative” as it used to be.
“If you had 20 years to go before you retire, this change would have a profound impact on you,” Ms. Fiore says. “I’m counting my blessings that the majority of my years here happened before this year.”