Moneybox

Y, M, C—What?

Why is the YMCA Retirement Fund classified as a charity?

An older man in a plaid shirt and baseball cap, made to look like he's on a piece of paper money.
Photo illustration by Slate. Photos by Thinkstock and Spoon Graphics.

This piece is part of the Slate 90, a series that examines the multibillion-dollar nonprofit sector. Read all stories from the Slate 90 here, and view the Slate 90 nonprofit rankings here.

You won’t find the YMCA on the Slate 90, partly because while the brand is national, the corporate structure is more fragmented. There is an umbrella national council of American YMCAs that had revenues of $144 million in 2015, but that’s a separate organization from, say, the YMCA of Greater New York ($188 million), the YMCA of San Diego ($156 million), or the YMCA of Greater Houston ($128 million). What you will find, however, at the top of the “Mutual/Membership Benefit” category, is the YMCA Retirement Fund.

The Slate 90 Mutual/Membership Benefit category is a weird one. While most categories in the Slate 90 consist largely of 501(c)(3) organizations with an obvious charitable bent, Mutual/Membership Benefit is mostly populated by organizations that provide insurance of one kind another—health insurance for employees of universities, liability insurance for health care providers, property insurance, and even income insurance in the form of pensions and retirement benefits. The whole category is anomalous on two different levels: Most insurance companies are not 501(c)(3)s, and most 501(c)(3)s are not insurance companies. And yet, thanks to the U.S. Congress and how easy, really, it is to be granted 501(c)(3) status, multibillion-dollar pools of capital like the YMCA’s retirement fund have managed to carve out tax-exempt status for themselves.

The Slate 90: Mutual/Membership Benefit rankings via fiscal 2015 revenue for organizations who filed Form 990 with the IRS.
Figures are 2015 revenue. Rankings by Slate and GuideStar.

Your local Y’s retirement fund behaves in many ways much like private pension plans: Employees pay into it, often with an employer match, and then receive a lump sum or an income when they retire. In the meantime, their funds are pooled into a single fund, which invests not only in the stock and bond markets but also in “alternatives” like hedge funds, private equity funds, real estate, and natural resources.

Like other pension funds, it has to pay its employees: In 2015, the YMCA fund’s CEO, John Preis, earned $944,128, while the chief investment officer, Hunter Reisner, made $929,712. There was also $17.58 million that the fund paid outside investment managers. But unlike other pension funds, if you look at the bottom of its list of expenses, you’ll find a much smaller line item: $52,059 in “church alliance dues.”

Why is a pension plan paying money to a church alliance? Because, technically, it is a church fund. Back in 2004, President George W. Bush signed into law H.R. 5365, “To treat certain arrangements maintained by the YMCA Retirement Fund as church plans for the purposes of certain provisions of the Internal Revenue Code of 1986, and for other purposes.” The bill, which passed both houses of Congress by unanimous consent, singled out this particular pension fund as being eligible for nonprofit status—which is why it’s now a 501(c)(3) that files a Form 990.

That law was very handy for the fund, which offers two different retirement vehicles: the core 401(a) retirement plan and a separate 403(b) savings plan. Thanks to the 2004 legislation, all of the money in both of those plans is commingled and invested as one large pool; that wouldn’t normally be legal.

More importantly, the plan also offers annuities to its participants. When you retire, you don’t really need a very large lump sum: Instead, what you’re often looking for is a set monthly check, for however long your retirement lasts (which is to say, until you die). With a normal retirement plan, you can take the money out of your retirement account, transfer it over to an insurance company, and convert it into a guaranteed monthly income, in a process known as annuitization. Of course, that causes the assets in the pension plan to fall, and the people running pension plans tend to prefer to keep ahold of those assets. In fact, what they’d really like to do is step into the shoes of an insurance company: promise an annuity to their members and start paying out a relatively modest income while retaining control of that member’s funds.

Normal pension funds aren’t allowed to do that, because, well, they’re pension funds and not insurance companies. If the member lives longer than actuarially expected, or if the investments in the fund don’t perform very well, then the annuity can end up costing the fund more money than the member ever had. But thanks to the 2004 law, the YMCA retirement fund is allowed to enter into such agreements with its members. That means much more money gets to stay in the fund. And the YMCA Retirement Fund has grown substantially as a result. It had revenues in 2015 of $644 million—larger than those of the national YMCA organization plus the three largest local YMCAs combined. In that year, its total assets came to $6.5 billion, which is a hefty chunk of money even by retirement-fund standards.

Today, more than 100,000 current and former YMCA employees participate in the fund, which distributed $340 million to beneficiaries last year. Still, it’s not entirely obvious why this particular fund needs its own congressionally mandated charitable status. Other 1920s pension funds, including the much larger Teachers Insurance and Annuity Association of America (TIAA), which lost its tax-exempt status in 1997, do perfectly well without it. The difference, perhaps, just lies in the fact that the Young Men’s Christian Association Retirement Fund has the word Christian in its name and has branches in many congressional districts. If you’re a church, it seems, or have some other leverage with Congress, you can get away with stuff that mere teachers couldn’t dream of.

Read more about the Slate 90’s methodology.