Reformulating Retirement Systems Saving Millions For Large Plans
Some of the nation’s largest charities spend millions on employee retirement systems. Each dollar that can be saved on the management and administration side of things is another that can be used toward mission. And with thousands of employees for some nonprofits, there are plenty of dollars spent on that side of the ledger.
American Cancer Society (ACS) has some 6,000 employees — and about 10,000 participants in its pension plan. In recent years, retirement costs for American Heart Association (AHA) have run anywhere between $16 million and $19 million.
About a year ago, the board at ACS approved freezing the organization’s defined benefit pension plan. Effective June 30, 2016, participants in the plan will no longer accrue benefits and no new participants will enter the plan.
ACS redesigned its retirement plan about 10 years ago, adding a defined contribution plan and reducing the formula on its defined benefit plan, according to Chief Financial Officer Catherine Mickle.
With new leadership recently taking over at the organization — former board chairman Gary Reedy became CEO in April 2015 — it was a good time to review the financial impact, interest rates, regulatory environment, and funding levels of its retirement plans, Mickle said. “With the trends we’d been looking at and cost implications, we continued to analyze and manage,” she said. New leadership provided an opportunity to re-address it.
The move away from a defined benefit plan will save ACS about $2.5 million in Pension Benefit Guaranty Corporation (PBGC) premium fees over the next decade. The organization’s pension obligations were reduced from about $273 million to about $195 million as of December 2015. Within those obligations were some SERP and health plans.
“Any time you can get rid of those [unproductive costs] and drive them into mission, we’re going to take advantage,” Mickle said. Organizations won’t ever get the value of the PBGC premiums unless they need restitution for their plans, which ACS would not due to the historical and current health of its plan, she said.
ACS retained the defined contribution plan that was initiated in 2006 and increased the match amount because the defined benefit was now frozen. Under the previous plan, the organization would match the first 3 percent of deferred compensation by a participant and 50 percent of the second 2 percent. Under the new plan, ACS will match the first 4 percent fully, and 50 percent of the second 4 percent.
Working with compensation consultant Willis Towers Watson, Mickle was surprised that there still are a lot of nonprofits with open defined benefit plans.
Only about 4 percent of organizations offer a defined benefit pension plan, according to the 2015 Nonprofit Organizations Salary & Benefits Report by The NonProfit Times and Blue-water Nonprofit Solutions. Defined benefit plans were most common, by far, among the largest organizations (those with budgets of $50 million or more), where more than one in five offered them. Still, the most popular plans were 403(b), about 35 percent overall, and 65 percent among the largest organizations.
It’s not usual for nonprofits to modify retirement plans but it’s a big undertaking so it doesn’t occur very often. More than a few charities tweaked their plans coming out of the recession several years ago.
American Heart Association (AHA) has a 401(a) defined contribution plan. The Dallas, Texas-based nonprofit contributes 6 percent for 2 to 5 years of service, 8 percent for 5 to 10 years of service, and 10 percent for 10 or more years of service. AHA also contributes a match of up to 4 percent of an employee’s contribution to a 403(b) plan.
Eligibility requirements for postretirement benefits were amended in 2009. Employees who have retired or will retire at age 55, and who have been employed at least 10 years prior to retirement, also are eligible for postretirement benefits. AHA provides eligible employees who retire prior to age 65 with medical, dental and life insurance. Employees with at least 10 years of service or whose age and years of service were at least 50 maintained eligibility.
As of March 1, 2009, employees who did not meet either of the requirements could participate upon retirement up to age 65 but would be responsible for 100 percent of the cost. New employees joining after March 1, 2009 would not be eligible for postretirement benefits.
During the economic downturn in 2008 and 2009, AHA “implemented many cost-saving measures in the interest of good stewardship,” according to spokesman Greg Donaldson. The decision was made at that time to grandfather existing employees. AHA no longer offers this benefit to new hires. “At the time, we worked closely with an external consultant and actuary to project the cost implications of suspending the plan,” he said.
AHA funds its non-qualified deferred compensation plans from operating expenses as employee elections become eligible, according to Donaldson. “This allows these dollars to adjust based on the participant elections. Therefore, from a cash flow perspective it is not a significant one-time expense to the AHA,” he said via email.
Like many charities and for-profit corporations during the recession, the American Red Cross suspended the employer match from Jan. 1, 2009 through 2011. The Retirement System of the American National Red Cross was closed to employees hired after June 30, 2009, and effective Jan. 1, 2009, it eliminated plan coverage for retiree medical and life benefits for all future retirees who did not meet certain eligibility conditions.
In July 2012, the board adopted a plan amendment to the retirement system freezing benefit accruals as of Dec. 31, 2012 for all plan participants, except for a small group of represented employees. The amendment would result in a curtailment gain estimated at $176 million in 2013.
The process at ACS started at the end of August 2015, surveying staff and analyzing the results before the board voted in November. “We hadn’t done it in a few years, but we wanted to make sure we’re comparable with other nonprofits or not, or in favor or out of favor,” Mickle said. ACS took several extra weeks to complete the survey and analyze results.
“To the extent an organization can do that, and not just hear from a subset of people, that was a strong data point,” she said. And after the board made its decision, included within communication to staff were some points that were made about how it connects to survey results.
As with any large change, initial feedback is always different from long-term feedback, Mickle said. The board approved the change at its fall meeting but it was not announced to the 6,000-strong workforce until winter. ACS used that time to communicate with and educate employees, with the help of its third-party provider.
In the beginning, people were unclear and unsure about the changes. “A lot of people don’t understand retirement plans at a detailed level, nor should they,” Mickle said. “Their initial gut reaction is something is being taken away from me, and they go to that protection mode,” she said. “We feel like it’s a much more sophisticated option, and where trends are going.”
With the plan freeze, all current and future employees will participate in 403(b) and 401(k) plans, which offer a certain employer match while the benefit earned in the defined benefit plan is frozen as of June 30, 2016.
If it was going to be an exercise just to cut costs, Mickle said that could have been done but likely resulted in unbalanced solutions. The board’s compensation committee helped to determine guiding principles to serve as a reminder of their goals.
“We used those to frame the work. If we felt like we were getting outside the guard-rails, we used the guiding principles to get us back,” Mickle said.
“We really tried with the compensation committee and board, senior staff tried to take a long view of what would be best going forward, look through a couple of different lenses, including cost and risk, but more importantly, talent. We tried to look down the road to be comfortable that the decision the board was making was forward leaning, so as not to have to go back and address,” Mickle said. “It was a very deliberate process because it was a big change,” she said.
“One of the things we really deliberated was we decided to survey the workforce,” she said. While data were included in the conversation, there also was an empathetic piece because it “can’t be all data driven since you’re dealing with people.”