The United Methodist Church: leading a new (old) benefits trend?

Mary Williams Walsh writes in the New York Times: “United Methodist Church Bucks the Trend on Employee Pensions”

More than 17,000 employers in the United States have discontinued their traditional pension plans in the last 10 years. Countless others have scaled them back. . . .

Now, though, one big employer is resisting the tide. Earlier this month, the United Methodist Church voted . . . to start an old-fashioned, defined-benefit pension plan for its 25,000 American pastors and lay employees . . . .

The United Methodist Church appears to be the first sizable employer to create such a pension plan in many years. The church has about $12 billion in other types of retirement plans, putting it on a par with big pension-plan sponsors like Bank of America and Dow Chemical. . . .

For older workers, the birth of a brand-new pension fund holds out tantalizing possibilities. As the ranks of aging baby boomers have begun to contemplate their retirements, some have shown renewed appreciation for the defined-benefit pension.

In the booming 1990’s, workers happily enjoyed the gains they recorded on their defined-contribution plans - like the 401(k) - that companies often set up to replace their discontinued pension plans.

But the bursting of the stock market bubble showed how quickly a hard-earned 401(k) balance could melt away, and the sturdy old pension began to look better by contrast. . . .

The rekindled interest in traditional pensions, however, comes at a time when most employers have decided that it makes no sense to start a pension fund. Defined-contribution plans are widely seen as simpler to set up and cheaper to offer. . . .

“I guess I’m old-fashioned,” said Barbara Boigegrain, secretary general of the United Methodist Church’s General Board of Pension and Health Benefits. “But I don’t feel that a defined-contribution plan only is necessarily the best way to take care of employees. Especially for a large, stable organization that has a considerable future in front of it.”

The United Methodists have a couple of big advantages over profit-making companies in their ability to offer pensions. . . .

But the United Methodists could set an example for others not subject to the federal pension rules. Potential converts include county hospitals, state universities, police and fire brigades, public and parochial school systems, professional associations and other employers outside the private sector.

Church officials say that in any case, they can justify their decision on solid financial grounds. Their experience running a 401(k)-like defined-contribution plan left them unconvinced that such programs are cheaper and simpler to run than pension funds. Their defined-contribution plan has been an administrative nightmare . . . .

In addition, the United Methodists’ existing retirement plan was troubled by its own success. . . . By 1999, their 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,” . . . “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.” . . . Read more

OK, I have a bias here. I’m a member of a United Methodist Church and find it to be a very good, well-run organization in many ways.

But as the next article shows, this may indeed be the wave of the future. To mix metaphors, the pendulum on so many things in America tends to swing from one extreme to another, and maybe now this one’s ready to swing back the other way a bit.

Investors.com has this story by Andrea Coombes: “Are firms underestimating cost of switching to 401(k)s?”

Against a rising tide of companies dumping their traditional pension plans, one industry expert is raising a red flag: Firms could face unforeseen costs in the future from abandoning such plans. . . .

Companies “might lower their contribution to retirement plans by making this switch (to 401(k) plans), but their labor costs overall, including retraining and turnover costs, are likely to rise, and they’re less likely to have people retiring when they expect them to or hope that they might” . . . . Those costs will become more striking as waves of Baby Boomers start retiring in coming years . . . .

“The people that often have a lot of the intellectual capital of the firm, the experience with clients, people that add a lot of value to an organization: The defined-benefit plan provides a real hook to keep them there to the target retirement date,” Fuerst said.

Plus, traditional plans give firms greater control over their workforce, said William Arnone, partner in Ernst & Young’s human capital practice.

“Under the defined-benefit plan, you can say ‘we’re going to make the formula more attractive, add some years to your service, if you retire within a certain period. In a 401(k) plan, there’s no formula to manipulate,” he said. . . .

There are fewer than 31,000 private-sector pension plans now, down from 100,000 in the 1970s, due largely to new companies bypassing traditional pensions, plus older companies switching from traditional pensions to 401(k) or other defined-contribution plans.

In 2001, about 21 percent of heads-of-household who participated in a retirement plan had a traditional pension, down from 42 percent in 1992, according to the Employee Benefit Research Institute.

Meanwhile, in 2001 about 62 percent of family heads had a defined-contribution plan, up from 41 percent in 1992. The percentage with access to both types of plans stayed steady at 17 percent in those years. . . .

The average expected retirement age among defined-contribution plan participants jumped to age 64.4, from age 60 in 1995, and 70 percent are somewhat or very concerned that they won’t have enough money to retire, according to a new survey by John Hancock Financial Services.

That’s in large part because 401(k) and other defined-contribution plans put longevity risk — the risk that the retiree will outlive her benefits — onto each individual rather than pooling that risk across a group of workers. . . .

But, while some companies have re-opened frozen pension plans, experts see little evidence that there’ll be a full-scale move back to traditional plans soon. . . .

Some see a future where both 401(k) plans and defined-benefit plans exist, but are changed to meet changing needs. . . .

In the end, it may be up to workers to push for a stronger retirement benefit for themselves. “As the Baby Boom generation gets closer and closer to retirement, (employers) are going to realize they indeed have an increased demand for the benefits that defined-benefit plans have for employees,” said Jack VanDerhei, a fellow at EBRI and a professor of risk insurance and health care management at Temple University.

While VanDerhei sees little evidence of market forces impelling employers to revisit defined-benefit plans, Fuerst is optimistic that workers will push for benefit changes. . . . Read more

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