A comprehensive retirement plan doesn’t just enhance the compensation package your staff receives. It also strengthens your church’s ability to attract and retain the best employees while balancing your costs.
When that employee reaches retirement age, having built a good nest egg will allow them to retire — when they are ready to and when you are ready for new leadership.
Start by considering the following steps when creating a retirement plan: Establishing employee classes, determining whether or not to have a waiting period, funding options of employee plans, and vesting.
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Establishing employee classes allows you to tailor benefits to different categories of employees. To start, define each class. You can use a variety of criteria. Examples of common classes for churches include ordained staff, full-time staff, part-time staff, teachers, etc.
Once you have a draft of employee classes that make sense, walk through the next series of choices in plan design and apply them to each class in the way that helps you achieve your goals.
Waiting periods encourage retention while minimizing the financial risk associated with paying benefits for employees that may not stay. Some churches allow employees to enroll upon hire and start receiving benefits immediately. Other churches require that new employees wait three to six months before being eligible for benefits.
Establishing a waiting period can help you determine if a new staff person is working out before paying for benefits. At the same time, delaying the start of benefits may result in employees missing out on funds they could be saving now. Weighing your potential financial risk versus employee retention is a must when determining whether or not to establish a waiting period.
There are three ways to fund an employee’s retirement plan: Non-matching employer contributions, matching employer contributions, or employee contributions.
Non-matching Employer Contributions are a straight contribution made by the church on behalf of an employee regardless of an employee’s participation in the plan.
Matching Employer Contributions require an employee to participate in the retirement plan in order to receive the church’s contribution.
A matching plan includes two components: 1) The maximum amount an employer will contribute; and 2) The rate at which employee contributions will be matched. Some plans match an employee’s contributions dollar-for-dollar — a matching rate of 100 percent.
You can chose a different rate, say 50 percent, which would mean for every dollar an employee contributes, the church contributes 50 cents.
Employee Contributions are made by employees through payroll deduction. This method of contribution has no direct cost to the church since it is the employee’s own salary that is the source of the funds. While an employer can make this type of contribution as the sole source of funding available, it is most commonly used in combination with one or both of the other contribution types.
You can combine these three sources in any way to achieve your goals for different categories of employees.
Vesting refers to ownership over funds in a retirement plan. A vesting schedule determines when your employees own the employer contribution to their retirement account. When an employee is 100 percent vested in the employer contribution to their account, they own 100 percent of it — employee contributions are always 100 percent vested. Prior to being 100 percent vested, you, as the employer, owns all or a portion of the amounts that you have contributed.
Using vesting appropriately encourages employees to remain with you and helps you manage costs relative to employees who leave employment earlier than you would desire for their position.
Cliff vesting and grade vesting are the two types of vesting allowed by law. With cliff vesting an employee vests at 100 percent all at one time, no later than the end of the third year of employment. If they leave their job prior to the end of the vesting period, the employee is only allowed to keep those funds that they contributed from their salary.
A graded vesting schedule vests an employee with an increasing percentage of their account over time, up to a maximum of six years. As with cliff vesting, if an employee leaves employment before becoming 100 percent vested, the employer retains the non-vested funds to be used to offset the ongoing costs of the retirement plan. The accompanying illustration shows examples of a three-year cliff and a six-year graded schedule.
Offering your employees a retirement savings plan can significantly improve employee retention and satisfaction. Working with your benefit provider, you can tailor a plan that is affordable and that your staff will value. The sooner you and your employees start saving for retirement, the better.
Rose Harper is senior benefits consultant for MMBB Financial Services.