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Most Americans have watched their retirement plans suffer over the past two years. But the 500 members of the Augsburg Fortress pension plan have had it worse than most.

The publishing arm of the Evangelical Lutheran Church in America (ELCA) folded its plan in December, forcing beneficiaries to accept a significantly reduced income. The announcement, as well as similar ones from other church-affiliated organizations, has opened debate on how such pension plans are regulated.

As a church plan, Augsburg Fortress's is not insured by the federal agency that insures private pension plans. The 1974 pension law's exemption for churches has expanded to include church-affiliated nonprofits, such as hospitals, social service agencies, and publishers. Now the IRS is considering limits on such organizations' ability to convert to church plans.

The Augsburg Fortress case may intensify that consideration. Knowing the plan was underfunded, the publisher stopped enrolling new employees in 2005. But after the stock market collapse and a tough publishing climate, the plan was nearly empty and the publisher distributed the remaining funds. In response, beneficiaries sued.

As many as 86 organizations converted federally insured plans to church plans between 1997 and 2007, says Karen Ferguson, director of the Pension Rights Center. It is not known how many have failed since there is no central oversight. "The result has been devastating for employees," she says, "who will get a small fraction of the retirement benefits they earned."

But churches do not operate like corporations, says the Church Benefits Association, and regulating church plans could entangle the government in religious matters. Ira Lupu, a law professor at George Washington University, ...

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October 2010

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