Grant Williams

A new study concludes that many nonprofit organizations are having major problems trying to sustain the benefits they provide employees through pension plans.

Numerous organizations are coping by offering less generous retirement benefits and reducing the scope and scale of their plans’ coverage, “actions which have serious implications for nonprofit workers and their families,” said the report by the Johns Hopkins University’s Listening Post Project.

The project, which is supported by the Johns Hopkins Center for Civil Society Studies and 10 other nonprofit organizations, conducted a survey of its national sample of nonprofit human-service, community-development, and cultural organizations. The report did not identify the organizations that responded.

The report — “Escalating Pension Benefit Costs: Another Threat to Nonprofit Survival?” — said struggling organizations include those that offer so-called defined-benefit plans as well as those that offer defined-contribution plans.

Defined-benefit plans provide set amounts of money to retired workers. Employers take on the full cost and risk of saving for their employees and making guaranteed retirement payments to them. Fifteen percent of organizations — generally larger groups with greater numbers of employees — said they offered such plans, the report said.

Defined-contribution plans, such as 403(b) plans, allow employees to save before-tax earnings through payroll deductions; employers may contribute to them. Fifty-eight percent of survey respondents said they had such programs for workers, the report said.

‘Under Stress’

Seventy-six percent of surveyed organizations that offer defined-benefit pension plans said that their plans are currently “under stress,” the report said. Forty-three percent of those with defined-benefit plans said the stress was “severe” or “very severe.”

The report said that the stock-market crash has left many nonprofit organizations with defined-benefit plans having trouble setting aside money for future payments to retired employees.

The report noted that a federal law, the Pension Protection Act of 2006, significantly increased the defined-benefit pension obligations of charities and other employers as organizations guarantee that they will have enough money to pay retired workers.

The law requires organizations to have money in place to fully cover these plans “and to make up any shortfall resulting from market fluctuations through increased contributions into their pension funds over a seven-year period,” the report said.

“Because the recent economic downturn has resulted in significant reductions in the value of pension-plan investments, however,” the report said, “this 2006 Act requirement is subjecting these organizations to rather severe obligations, and, as a result, many are having to divert resources from their program operations to their pension plans at a time when needs are growing and resources are shrinking.”

In response, the report said, nonprofit and other employers are pressing for legislation that will temporarily give them more time to bring their pension plans back to fully funded status. (Earlier this week, two members of Congress introduced legislation that would ease the rules.)

Between 2007 and 2008, average defined-benefit plan pension costs faced by nonprofit groups increased by 6 percent, which is double the inflation rate, the report said. “What is more, these organizations’ average unfunded liability more than doubled, jumping from $658,104 in FY 2007 to nearly $1.4-million in FY 2008,” the report said.

Orchestras were more than twice as likely as organizations in other fields to have defined-benefit plans, the report said, in part because a significant portion of musicians are members of a union “and have collectively bargained for defined-benefit plans.” In contrast, the report said, “no theater respondents reported offering defined-benefit plans.”

Orchestras were more likely than other groups to offer their employees both defined-benefit and defined-contribution plans, the report said. “Orchestra administrative staff and musicians are often offered different plans,” it said.

Employer Matches

The Listening Post Project report said that, “somewhat surprisingly,” a sizable majority — 58 percent — of organizations that offer defined-contribution pension plans such as 403(b) plans said that their programs are currently “under stress.” Eighteen percent of those offering defined-contribution plans said this stress was “severe” or “very severe.” (Defined-contribution plans are not covered by the Pension Protection Act.)

One major source of the stress seems to be the “employer match,” the report said, which is the contribution some employers add to the money that their workers have put into their retirement funds.

“These matches have been common at nonprofits, with 86 percent of organizations with defined-contribution plans indicating that they make some type of employer match,” the report said.

“As evidence that such matches seem to be a source of nonprofit strain, a considerable majority (60 percent) of organizations with employer matches noted that their defined-contribution plan is currently under stress,” the report said. “By contrast, only 40 percent of organizations that do not offer such matches reported that their plan is under stress.”

The report said that, importantly, “while 42 percent of organizations with defined-contribution plans reported that their plan has just ‘minimal stress,’ these data may be hinting at another issue nonprofits are dealing with: low employee participation in nonprofit retirement benefit plans, as low wages, particularly in a depressed economy, make the option of directing wages towards retirement too prohibitive.”

The report said that organizations that help older people with housing and other services “were somewhat more likely than those in other fields to offer defined-contribution plans.”

Cutting Costs

One approach that nonprofit organizations with defined-benefit plans are taking to reduce costs is to reduce the scope and scale of their coverage, the report said. “This can be done by closing the plan to new employees or stopping future benefit accruals for some or all employees (commonly referred to as ‘partial’ or ‘hard’ freezes, respectively),” the report said.

Twenty-eight percent of nonprofit groups that sponsor a defined-benefit plan have prohibited new employees from participating, the report said. Twenty-two percent of groups with such plans have ended future benefit accruals for all participating employees and another 9 percent have blocked future benefit accruals for some workers.

Numerous nonprofit organizations with defined-contribution plans are deciding to reduce their “employer match,” the report said. In the past year alone, 14 percent of respondents offering a match have reduced it and another 3 percent have eliminated their match altogether.

“Interestingly, orchestras and the largest organizations were considerably more likely than organizations representing other fields and size classes to have decreased or eliminated employer matches, suggesting that they are feeling particular strain,” the report said.

Turn-Over Concerns

Pressures on organizations to sustain retirement benefits for their employees have already had significant consequences, the report said.

One respondent to the survey said: “This nonprofit is about to lose very valuable staff because of the inability to provide benefits.” Another said: “We worry that not being able to supply a pension plan to our administrative staff is contributing to high staff turnover and will have a serious long-term effect on the orchestra’s ability to fulfill its mission in the best possible way.”

The report from the Listening Post Project will be available online on Thursday, November 5.

The Internal Revenue Service has released the fifth in a series of tip sheets to help nonprofit organizations prepare their Form 990 informational tax return, the primary document that groups file each year.

The new tips focus on information the IRS seeks about organizations’ foreign activities on both the “core form” filed by all organizations and Schedule F, “Statement of Activities Outside the United States,” that some groups must also submit.

The IRS significantly redesigned the Form 990 for the 2008 tax year and Schedule F is a new attachment.

— Grant Williams