Without delving too deeply into philosophy, it is probably safe to say that some people are compelled to do the right thing only because of the fear of punishment. As a young child, if I had the opportunity to take an extra cookie and not get caught, I may very well have taken full advantage of the situation. However, more often than not, the fear of getting caught with my hand in the cookie jar prevented me from doing it.

As adults, the ethical and moral situations we face are more complex, but often follow the same principles. Laws are in place to define behavior that is acceptable and unacceptable, and punishments are defined to ensure that the laws are followed.

For example, there is a punishment defined for someone who is caught stealing, and for many people, the fear of punishment is all that stands in the way of loading up with free stuff. For others, the fact that there is a law against stealing is largely irrelevant. Stealing is simply wrong and therefore it is "off the table" as an option.

Financial regulations are in place to protect investors from financial harm, and to make sure there is consistency in the treatment of their investments. Again, it is probably safe to say that the only thing standing in the way of some advisers and brokers from cleaning out a client's savings account is the fear of getting caught.

The proof is in the numerous cases of financial professionals who do get caught.

The moral opposite of this would be a fiduciary who faithfully carries out his or her duties, ensuring that client interests always come first and that services are performed with a high degree of professionalism and competence.

Unfortunately, there is a large gray between these two opposites, or at least a lot of opportunity for well-meaning professionals to debate. This is where ERISA comes in for retirement plans.


ERISA guidelines - it's the law

Among its many purposes, ERISA establishes accountability for ensuring that a retirement plan benefits the employee as opposed to the employer. Protecting an employee's retirement savings is much more complicated than a "don't steal money" law, so it's important to have a set of minimum guidelines in place to ensure that employees are treated fairly and consistently.

A plan fiduciary may sincerely desire to do a good job, but if he or she has limited competence in the area of retirement plans, an employee's retirement savings can suffer the same result as if someone stole it.

Under ERISA, a fiduciary who does not follow acceptable standards of conduct may be required to restore losses to the plan. This is good, because most people consider their retirement savings to be a serious subject.

The special case of churches

When ERISA was enacted in 1974, it included a "safe harbor" provision that allowed non-profit employers who meet certain conditions to avoid ERISA requirements. Since that time, the safe harbor rules have gradually been narrowed to require more fiduciary duties.

Churches, however, are still exempt from ERISA requirements unless they specifically elect to comply. By not electing to comply with ERISA, the church can eliminate regulatory hassle and take advantage of a number of side benefits:

* no reporting and disclosure requirements

* no financial audits

* no plan document

* no prohibited transaction rules

* no federal fiduciary obligations

There are a few drawbacks to a non-ERISA plan, but the ease of implementation tends to outweigh the drawbacks. But how does this look from an employee perspective? The plan the church secretary has diligently channeled her retirement savings into:

* has no disclosure requirements

* is not subject to financial audits

* has no plan document

* has no conflict-of-interest safeguards

* does not have a plan fiduciary who accepts responsibility for the plan

* has no safeguards against unreasonable fees

The list could go on, but the bottom line is that it is difficult to see how a church employee, who is just as concerned about his or her retirement savings as someone working at Wal-Mart or Joe's House of Plumbing, benefits from the lack of guidelines.

The alternative is problematic, and can be seen simply by trying to identify who the plan fiduciary would be for an ERISA-compliant church plan.

The church pastor is not likely to have the knowledge and skill to carry out fiduciary duties "with the care, skill, prudence, and diligence" of a financial professional.

The church's financial committee might be a better choice, but these committees are constantly changing membership, and who would want to take on the job of committee member if it also means assuming personal financial liability for a retirement plan? The end result is that most churches choose to avoid ERISA, but now we have a moral dilemma. Should there be a lower standard of care for an employee's retirement savings simply because they work for a church?


The dilemma

ERISA requires retirement plan sponsors to name either a person, group, or position as a fiduciary to ensure that employees' retirement savings are protected from excessive costs, inappropriate investments, and a host of other pitfalls. These requirements are in ERISA because they are necessary for the safekeeping of retirement investments, and without the law and its associated punishments, some employers would take advantage of employees, either intentionally or simply through neglect.

However, similar to the example of stealing cookies, other employers do not need a law to know that treating their employees' retirement savings with care and professionalism is simply the right thing to do. There is a moral obligation as well as a legal obligation. The fact that a church is not subject to ERISA guidelines does not free them from the moral obligation that ERISA attempts to enforce by legal means.

TSAs and 403(b) plans

When 403(b) plans were created in 1958, participants could only invest in annuity products, so the name "tax-sheltered annuity" stuck. TSA plans have been allowed to include mutual funds since 1974, but insurance companies were the original providers of TSA plans and continue to be entrenched as plan providers to churches. TSA plans are typically serviced by vendor representatives who have a product to sell.

According to Dan Otter of 403bwise, "participants have often been sold unsuitable, high-fee products with onerous surrender charges that benefit the representative more than the participant."

The standard of care built into ERISA and the competition among 401(k) plans, along with a gradual shift from product-aligned sales representatives to independent, client-aligned advisers all tend to benefit the plan participant, but many church employees are missing out. Many church plans are stuck in a model that was developed 40 years ago or more.

Churches can use 401(k) plans or competitive 403(b) plans and still choose to be non-ERISA compliant, which opens up a much larger world of plan providers who have been battling it out on service and cost in the private sector. The main difference between a 403(b) plan and a 401(k) plan for a church is the 403(b) lifetime catch-up provision, which allows employees with 15 or more years of service to contribute an additional $3,000 per year, up to a lifetime limit of $15,000.

Most churches tend to stick with the plan that was sold to them sometime in the distant past because they do not have a professional on staff who can operate as a plan fiduciary. Unlike a private company, there is often no one scrutinizing plan costs on a regular basis, or monitoring the plan provider's due diligence in selecting investments, or asking why each contribution has a seven-year surrender charge. However, a church should not be free of the moral obligation to protect their employees' savings simply because it's difficult.


Reach Verseput, a financial planner with Veripax Financial Management, LLC in El Dorado Hills, Calif., at jerry.verseput@veripax.net.

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