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Archdiocese to end lay pension plan

Cites economy in move to 401(k)-style option

By Lisa Wangsness
Globe Staff / December 12, 2010

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The Roman Catholic Archdiocese of Boston plans to freeze the pension plan for about 10,000 church secretaries, parochial school teachers, and other lay employees as the church joins a raft of nonprofit organizations and private corporations that have limited or modified retirement benefits in a down economy.

Church officials say the move will stabilize the lay pension fund, which was 78.4 percent funded as of last June, and ensure that employees don’t lose benefits they have already earned. Though it was fully funded as recently as 2007, the fund was badly damaged in the financial meltdown of 2008, the archdiocese said. The church plans to continue contributing to the fund until it is fully solvent.

The benefits of employees who are already retired will not be affected, church officials said. Lay employees who are already vested, or become vested, in the plan will receive all the money that have earned when they retire. But they will not accrue additional benefits after Dec. 31, 2011.

At that point, the archdiocese will offer the retirees, as an alternative, a 401(k)-style plan. But some employees are unhappy because the church is replacing a guaranteed benefit with one that requires workers to assume more risk.

About 40 percent of the lay pension fund’s beneficiaries are current employees.

Archdiocesan officials say they are making the move for the same reasons that many corporations have replaced traditional pensions with “defined contribution’’ plans, such as 401(k)s, in which employees set aside part of their salary, often with an employer match, and control their own investments. People are living longer and drawing more benefits over time, ratcheting up the cost of pension plans to employers. The volatility of the financial markets in recent years has also made employers wary of taking on too much risk.

“This is not a situation that is unique to us — there are very few defined pension plans that aren’t stressed today, and I think in many corporate settings and in many not-for-profit settings the same discussion is taking place,’’ said James P. McDonough, chancellor of the archdiocese. “We are just trying to tackle this head-on.’’

Charles Zech, an economics professor and director of the Center for the Study of Church Management at Villanova University, called the 401(k)-style plan “the wave of the future’’ for US dioceses. Many dioceses have already begun the transition, he said, including Brooklyn, N.Y., Detroit, Dallas, and Phoenix.

“Every diocese in the country is suffering financially right now,’’ Zech said. “If they want to keep up their ministries, where are the cuts going to come? This is not necessarily a cut, but here is one way to . . . make sure they are not bearing all the risk themselves.’’

But some beneficiaries of the pension plan are unhappy with the change.

Cathy Minkiewicz, the former director of adult faith formation and lay ministry formation for the archdiocese, was laid off in 2005; at 65, she is already receiving her pension and probably will not be affected by the change. But she is concerned for others.

“Working for the diocese, you made certain sacrifices as to how much you were earning,’’ she said. “You expected to at least be taken care of in your old age.’’

The church and its employers contribute the equivalent of 7 percent of employees’ salaries toward the lay pension fund. The church plans to end that practice, and instead to devote the equivalent of 2 percent of salaries toward the new 401(k)-style plan and 5 percent toward closing the gap in the lay pension fund.

McDonough said it could take many years for the pension fund to become fully funded again, but when it is, the church hopes to redirect the money it had been paying toward stabilizing the fund toward other employee benefits. He said employees have not had a raise in four years.

“I don’t think we are looking to reduce our total compensation dollars at all through this,’’ he said.

The church is offering employees who are 55 and older as of the end of next year two options for cashing out of the lay pension fund early — albeit at a financial loss.

Those workers can choose to receive their benefits in a single lump sum, or to begin receiving annuities while they continue to work. But the early payments would be reduced to reflect the plan’s unfunded liability and, in the case of the annuities, to reflect the younger age at which the employee receives payments.

If, for example, an employee who has earned $30,000 in benefits chooses the lump-sum option and cashes out and the plan has been 80 percent funded, on average, during the previous year, she would receive $24,000.

The more employees take advantage of these opportunities, the faster and cheaper it will be for the church to reduce its risk and eventually end its obligations under the plan. But pension experts say both deals are poor ones for employees, unless they have a terminal illness, because it guarantees that they will receive a smaller amount of money than they have earned.

“It’s really ugly, trying to get people to make bad financial decisions to save the Catholic Church some funding,’’ said Norman P. Stein, an authority on pension law and a professor at the Earle Mack School of Law at Drexel University.

He said corporations, unlike religious organizations, are prevented by law from discounting lump-sum payments to reflect a pension fund’s underfunded status. He said the payouts can be tempting, particularly for the unemployed, but financially unwise. “People sometimes have a hard time looking very far into the future.’’

Carol Gustavson, executive director of human resources, benefits, and administration for the archdiocese, said the archdiocese has had many meetings with employees to explain the changes, and workers have been repeatedly told that the lump sum and annuity options are voluntary. In addition, she added, the archdiocese is offering free financial counseling to employees.

“We are being very candid with people about what this is, and what it’s not,’’ she said. “It’s a voluntary choice.’’

Lisa Wangsness can be reached at lwangsness@globe.com.