Establishing a retirement plan for Pastor Wells
A Case Study in How We Help
What is a reasonable retirement package anyway?
Too often church boards lack the knowledge and experience to create an appropriate retirement package for their senior pastor who has served the church faithfully for many years or even decades. When the topic of a retirement package is broached, conversation around the board table generally includes praise for the pastor whom they love and respect. But when the time comes to determine an appropriate retirement package to provide, the board room goes quiet.
At this point in the board meeting, one person may throw out a number that s/he considers “generous,” to which other board members react. The reality is that one person’s definition of “generous” can be vastly different from another’s.
The meeting continues until a dollar amount is decided upon by majority (or even unanimous) consent. But oftentimes the board members head home lacking confidence in knowing whether what they just approved was appropriate or not.
The desire to “bless their pastor” for his years of service is clearly a leading objective, but there’s a knowledge gap in how to do so in a way that balances the needs and financial abilities of the church with an adequate compensation package. Many boards don’t know if, how, where, or when to start. And when they finally do start, they’re under pressure to reach a conclusion. Moreover, because of their delay in addressing the issue, they’ve lost valuable time that could have been used to discover and evaluate potential solutions.
Fortunately, one of our clients—whom we will call First Assembly, led by Pastor Wells—decided to engage outside expert advice prior to their pastor’s retirement. This case study shows how ChurchWay Advisors helped them make decisions without undue time pressure, leading to a beneficial outcome for the church as well as the senior pastor and the other long-tenured pastors who were granted retirement benefits.
A relatable background
When ChurchWay Advisors was engaged by First Assembly, Pastor Wells had been Senior Pastor for the past 19 years. He’d accepted the role of Senior Pastor when the church was struggling financially, and attendance had fallen. First Assembly had once been recognized within the denomination for its strong leadership and sound biblical teaching. Following the retirement of one of its earlier senior pastors, the church experienced a period of short-tenured successor pastors, which negatively affected church attendance. Pastor Wells found himself at the end of a string of pastors within the past few years.
In the early days of his tenure, Pastor Wells and his wife made many sacrifices to keep the church moving in a positive direction. Within a few years, attendance rebounded dramatically, and the church’s youth department enjoyed increased participation from new children and young adults. Over the next decade, church growth allowed Pastor Wells to hire a Children’s Pastor, a Missions Pastor, and a Creative Arts Pastor.
It became clear that the existing facilities were no longer adequate to support the needs of the growing congregation. However, First Assembly’s existing debt meant the church did not have the borrowing capacity to fund new facilities.
So, in his fourth year, Pastor Wells led the church through a capital campaign designed to reduce the church’s debt and position it for a future building project. The campaign raised $1.2 million toward debt retirement during a challenging economic environment.
Over the next few years Pastor Well’s aggressively paid down the church’s debt and ChurchWay Advisors refinanced the church’s loans several times during this period, each time resulting in more favorable terms as the church’s financial position improved. A second campaign was launched to raise funds for construction after which the church broke ground on a significant building project that included a new sanctuary and lobby, new church offices, new children’s areas, and renovations to older portions of the building. This $27 million expansion was completed two years later.
The church is preparing to celebrate its 100th anniversary in two years, and Pastor Wells has plans to usher First Assembly into its second century debt-free.
At age 61, Pastor Wells still has the energy and stamina his role demands, but his thoughts have turned to the future. In addition to handing the reins to his successor debt-free, he also wants to reward those pastors who, like him, have made sacrifices over many years to ensure First Assembly’s success. The board also desires to see this come to fruition.
A phased approach to implementing a solution
Against this backdrop, ChurchWay Advisors was asked to collaborate with Pastor Wells and the First Assembly Board of Trustees to create a retirement plan for Pastor Wells and his key leaders. We approached this assignment in four phases.
Phase I: Discovery
We conducted joint and individual meetings with Pastor Wells and board members to help each party articulate the objectives for establishing a retirement package for the designated individuals. We then evaluated each pastor’s historical compensation, including monetary components (base compensation, bonuses, contributions to existing retirement plans) and nonmonetary components (health insurance benefits, auto allowances, etc.). We also analyzed First Assembly’s overall financial health and its ability to fund a retirement plan
Phase II: Definition and Quantification of the Retirement Benefits
Once we had a solid understanding of each pastor’s historical compensation and understood the church’s financial health, we created a framework for how retirement benefits could be calculated for each pastor.
Through an iterative process, we developed a repeatable formulaic approach that took into consideration each pastor’s current compensation, compensation over time, and years of service. This included projecting retirement benefits into the future so the church could understand how the total cost of the retirement benefits would increase over time based on the factors inherent in the formula. By using a formula that could be applied to all individuals, we ensured that retirement benefits for each beneficiary would be determined objectively.
We also helped the board understand and decide upon provisions of the non-qualified deferred compensation plan that would govern the retirement benefits.
These included the specific timing of the retirement benefit payments, the use of the church’s existing 403(b) plan to help mitigate negative tax implications, and the rules around how to handle a participant’s death or disability.
To help ensure an orderly succession of duties from one pastor to his or her successor, we added a provision that required the retiring pastor to provide six months’ notice of his or her retirement in order to be eligible to receive the retirement benefits.
The outcome of Phase II was twofold: 1) a detailed document that outlined the framework of the deferred compensation plan; and 2) the alignment and agreement between the board of trustees and Pastor Wells regarding dollar amounts of each participant’s retirement package.
Phase III: Legal Structure
We provided the document produced in Phase II to a labor and employment attorney who was well versed in church and nonprofit law—converting the informal retirement plan framework into a legally binding Nonqualifed Deferred Compensation Plan.
The tax implications for participants were thoroughly analyzed, and improvements were made to such specifics as the timing of the benefit payments, affording the participants even greater flexibility and choices, all without creating an administrative burden on the church.
We established a Rabbi Trust as the funding vehicle through which the retirement benefits would be paid. This option required the appointment of a Trustee who would be tasked with general oversight of the trust’s assets. In the case of First Assembly, it made sense to appoint the Executive Pastor as trustee.
Phase IV: Funding
In the final phase of this engagement, ChurchWay Advisors forecasted the contributions into the Rabbi Trust necessary to ensure the retirement benefits would be fully funded within the timeline stipulated by the board, taking into consideration the expected earnings received on the investments. To protect private information (such as compensation amounts of the pastors), the board engaged a wealth advisor from outside the congregation to manage the assets of the Rabbi Trust.
We introduced church representatives to two qualified wealth advisors and helped the board select the one best suited to guide First Assembly. We reviewed the advisor’s investment recommendations and assisted the church in establishing a brokerage account for the Rabbi Trust. We also created reports to facilitate annual oversight by the board and the trustee (i.e., the Executive Pastor), defining the trustee’s annual reporting and due diligence obligations and equipping him to carry out these duties going forward.
Conclusion
First Assembly’s board members and Pastor Wells have expressed satisfaction with the results of this engagement. The retirement plan developed in conjunction with ChurchWay Advisors appropriately rewards the committed pastors whose work over the years has resulted in a strong, thriving church. The cost of the benefits is well within First Assembly’s financial capacity to afford. And the plan is easy to administer.
Plan participants expressed their gratitude to the board not only for the specific dollar amount of their individual retirement benefit, but also for feeling valued by the board. And finally, because the board chose to engage a third-party expert, and to do so well in advance of Pastor Wells’ retirement (in the absence of undue time pressure), they were much more confident in the decisions they made and the final outcome of the engagement.
Key takeaways
Start early. Avoid having to make decisions under time pressure and when emotions are high.
Engage an expert. Better decisions are made when you have all of the facts and understand the alternatives. A person knowledgeable in this area makes all the difference.
Evaluate the pastor’s current pay structure in light of comparable churches. Has the pastor been underpaid? If so, this should be considered in the final determination of his retirement payments.
Determine the church’s ability to afford the plan. A pastor’s retirement package should not put undue financial pressure on the church.
Consider tax implications. Tax efficient strategies will put more money in the pastor’s pocket without costing the church any more.
Protect the assets for the benefit of the retiring pastor. A Rabbi Trust is an excellent vehicle that helps to ensure that funds set aside for retirement payments are not used by future boards or successor pastors for anything other than their intended purpose.
Keep it simple. The plan should be easy to understand and communicate, and ongoing reporting requirements should be easy to implement.
Get in touch
If you would like a free consultation on how ChurchWay Advisors can assist you in developing a custom retirement plan for your senior pastor or other long-tenured staff members, please contact Mike Kern by clicking the button below or calling 586.212.4749. Helping you make good decisions is our specialty.
