Financial Statements and Report of Independent Certified Public Accountants Church of the Nazarene Nazarene 403(b) Retirement Savings Plan September

Transcription

1 Financial Statements and Report of Independent Certified Public Accountants Church of the Nazarene

2 C O N T E N T S Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS MODIFIED CASH BASIS 6 STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS MODIFIED CASH BASIS 7 NOTES TO FINANCIAL STATEMENTS 8

3 Audit Tax Advisory REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Grant Thornton LLP 1201 Walnut Street, Suite 2200 Kansas City, MO T F Board of Pensions and Benefits USA of the Church of the Nazarene We have audited the accompanying financial statements of (the Plan ), which comprise the statements of net assets available for benefits modified cash basis as of, and the related statements of changes in net assets available for benefits modified cash basis for the years then ended, and the related notes to the financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the modified cash basis of accounting described in Note B; this includes determining that the modified cash basis of accounting is an acceptable basis for the preparation of the financial statements in the circumstances. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Plan s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits modified cash basis of as of, and the changes in net assets available for benefits modified cash basis for the years then ended in accordance with the modified cash basis of accounting described in Note B. Basis of accounting We draw attention to Note B of the financial statements, which describes the basis of accounting. The financial statements are prepared on the modified cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Kansas City, Missouri February 23, 2018

5 FINANCIAL STATEMENTS

6 STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS MODIFIED CASH BASIS September 30, ASSETS Cash $ 1,204,974 $ 453,142 Investments at fair value Mutual funds Fidelity Growth Company Fund 56,462,538 45,292,817 Fidelity Balanced Fund 25,935,182 23,511,318 Fidelity Contrafund 34,398,656 28,424,632 Fidelity Freedom Index Income Fund 4,018,603 3,349,033 Fidelity Freedom Index 2005 Fund 3,500,441 3,257,227 Fidelity Freedom Index 2010 Fund 11,438,883 11,329,090 Fidelity Freedom Index 2015 Fund 20,734,869 19,889,041 Fidelity Freedom Index 2020 Fund 47,528,481 41,970,581 Fidelity Freedom Index 2025 Fund 32,182,932 27,330,153 Fidelity Freedom Index 2030 Fund 28,502,638 23,152,181 Fidelity Freedom Index 2035 Fund 16,180,697 12,836,876 Fidelity Freedom Index 2040 Fund 19,188,219 16,263,067 Fidelity Freedom Index 2045 Fund 10,210,354 7,961,382 Fidelity Freedom Index 2050 Fund 6,016,856 4,619,411 Fidelity Freedom Index 2055 Fund 1,521, ,581 Fidelity Freedom Index 2060 Fund 184,096 89,477 Fidelity Small Cap Value Index Fund 4,724,314 - MSIF Small Company Growth Portfolio Class A - 3,066,718 DFA U.S. Small Cap Value Portfolio Class A 6,750,605 6,138,940 Guidestone Equity Index Fund 3,392,835 2,185,945 Touchstone Value I Fund 6,941,602 6,304,385 Spartan Mid Cap Index ADV Fund 7,080,357 6,518,551 Spartan 500 Index ADV Fund 18,821,166 17,055,739 American Century Intntl Growth IS Fund 13,963,775 11,196,964 Metwest Total Return Bond I Fund 20,943,045 21,079,697 Total investments, at fair value 400,622, ,770,806 Investments at contract value Fidelity Fixed Fund 90,362,779 95,614,421 Receivables Notes receivable from participants 2,914,546 2,959, ,104, ,797,688 LIABILITIES Excess contributions payable 53,000 53,000 Net assets available for benefits $ 495,051,762 $ 442,744,688 The accompanying notes are an integral part of these statements. 6

7 STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS - MODIFIED CASH BASIS Year ended September 30, ADDITIONS Total investment income Net appreciation in fair value of investments $ 44,146,645 $ 21,425,037 Interest and dividends 11,422,469 12,630,966 55,569,114 34,056,003 Interest income on notes receivable from participants 124, ,814 Total contributions Employer contributions 6,629,800 6,586,579 Participant contributions 8,705,124 8,531,065 Rollover contributions 858,681 1,282,567 16,193,605 16,400,211 Total additions 71,887,161 50,579,028 DEDUCTIONS Benefits paid to participants 18,988,870 19,229,312 Administrative expenses 591, ,997 Total deductions 19,580,087 19,801,309 NET INCREASE 52,307,074 30,777,719 Net assets available for benefits, beginning of year 442,744, ,966,969 Net assets available for benefits, end of year $ 495,051,762 $ 442,744,688 The accompanying notes are an integral part of these statements. 7

8 NOTES TO FINANCIAL STATEMENTS NOTE A - DESCRIPTION OF PLAN The following description of the (the Plan) provides only general information. Participants should refer to the plan document for a more complete description of the Plan s provisions. 1. General The Plan is for the benefit of all U.S. ministers and laypersons serving local congregations and districts, as well as general church employees. The Plan was made and entered into effective as of the 1 st day of January, This Plan is a defined contribution plan established under Section 403(b) of the Internal Revenue Code (the IRC). The Plan was last amended on January 1, 2009 with the Board of Pensions and Benefits USA of the Church of the Nazarene being named the Trustee (Trustee) as part of the amendment. Fidelity Management Trust Company (Fidelity) serves as the Plan Administrator (Administrator) of the Plan assets. Lay or ministerial employees of Nazarene churches or church-controlled agencies and registered Nazarene chaplains may participate in the Plan. Nazarene churches or churchcontrolled agencies include the Church of the Nazarene, Inc. (the Church), the Nazarene Publishing House, Church of the Nazarene Foundation, Nazarene Theological Seminary, Nazarene Bible College, Nazarene Compassionate Ministries, Inc., or the subsidiaries of these entities, including Nazarene-affiliated colleges or universities. An eligible employee is any employee who receives compensation from a participating employer which is exempt under Section 501(c)(3) of the code, including, but not limited to, the General Board of the Church of the Nazarene, the Nazarene Publishing House, Nazarene Theological Seminary, Nazarene Bible College, Nazarene Compassionate Ministries, Inc., the Church of the Nazarene Foundation, or the subsidiaries of any of such entities and including employees of the Nazarene-affiliated colleges or universities and individuals described in Section 1.13(d) of the plan document ( Plan Document ) who are employed by an employer as defined in Section 1.14(d) of the Plan Document. 8

9 NOTE A - DESCRIPTION OF PLAN - Continued 1. General - Continued The Pensions and Benefits Fund (the Fund), a related party, provides administrative services and certain specific funding amounts as determined by the Trustee. For the years ended, administrative fees paid to the Fund amounted to $519,993 and $516,020, respectively, and are included in administrative expenses on the statements of changes in net assets available for benefits - modified cash basis. In connection with the administrative services provided, amounts paid by the Fund on behalf of the Plan for recordkeeping fees amounted to $167,790 and $266,510 for the years ended September 30, 2017 and 2016, respectively. Additionally, contributions provided by the Fund and other church-controlled agencies amounted to $4,162,556 and $3,614,073, including amounts for the annual pension supplement as further described in Note A4, for the years ended September 30, 2017 and 2016, respectively and are included in employer contributions on the statements of changes in net assets available for benefits - modified cash basis. 2. Plan Administration The Trustee is responsible for the day-to-day administration of the Plan. The Trustee is also responsible for maintaining accurate and detailed records and accounts of employees and of their rights under the Plan and all investments, receipts, disbursements, and other transactions. The Trustee is not responsible to determine that contributions made to the plan trust ( the Trust ) by a participating employer comply with the provisions of the Plan, nor does it have responsibility to collect or monitor the making of or the accuracy of any contributions payable or made by an employer to the Trust. The Trustee has the exclusive power and authority to control and manage the operation and administration of the Plan, including determining eligibility and participation in the Plan and overseeing benefit payment procedures. 9

10 NOTE A - DESCRIPTION OF PLAN - Continued 3. Contributions Contributions are made through either an employer-funded arrangement or a voluntary salaryreduction agreement with each participant s employer. Voluntary salary-reduction contributions are not permitted to exceed IRC limitations on an annual basis. Employers participating in the Plan are encouraged to match amounts totaling up to at least, but not limited to, 3% of the employee s voluntary salary-reduction contribution amounts. The Plan will accept a participant contribution of an eligible rollover distribution from a qualified Plan described in section 401(a) or 403(a) of the IRC, an annuity contract described in section 403(b) of the IRC, or from an eligible Plan under section 457(b) of the IRC which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state. Each eligible employee who was participating in the Plan on December 31, 2008, shall automatically continue as a participant. 4. Contributions for Certain Employees The annual pension supplement (APS) is determined by the Trustee. The APS contribution is deposited into participant accounts for each eligible U.S. clergy member and layperson from Fund receipts or church-controlled agency fund contributions, depending upon the participant s employer. The 2017 and 2016 APS contribution for eligible district superintendents, district assigned, and evangelists is $1,000. Total APS contributions amounted to $1,996,727 and $1,735,858, including $1,909,727 and $1,650,858 from the Fund, for the years ended, respectively, and are included in employer contributions on the statements of changes in net assets available for benefits - modified cash basis. 5. Participant Accounts Each participant s account is credited with the participant s and participating employer s contributions, as applicable, and allocations of (a) the Fund or church-controlled agency fund contributions and (b) plan earnings or losses. Allocations are based on participant earnings or account balances. The benefit to which a participant is entitled is the benefit that can be provided from the participant s account. 6. Vesting and Forfeitures Participants are immediately vested in all contributions plus actual earnings thereon. 10

11 NOTE A - DESCRIPTION OF PLAN - Continued 7. Investment Options Upon enrollment in the Plan, a participant may direct contributions to any of several investment options. For additional information regarding the Plan s investment alternatives and fund performance, participants should refer to the Plan document and published information provided by such funds. Participants may change or transfer their investment options on an as-needed basis. 8. Notes Receivable from Participants Participants may borrow from their fund accounts a minimum of $1,000, up to the lesser of $50,000 or 50% of their account balance. Note terms range from 1 to 5 years. The notes are secured by the balance in the participant s account and bear interest at prime plus 1%. Interest rates for current participant notes ranged from 4.25% to 4.50%. Principal and interest are paid ratably through monthly or quarterly installments. A Participant may have no more than one note from the Plan outstanding at any one time. 9. Administrative Expenses Certain expenses of maintaining the Plan are paid directly by the Trustee and are excluded from these financial statements. Fees related to the administration of notes receivable from participants are charged directly to the participant s account and are included in administrative expenses. Investment related expenses are included in net appreciation of fair value of investments. 11

12 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Accounting The accompanying financial statements have been prepared on a modified cash basis, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. Generally, under this basis, interest, dividends, and contributions are recognized when collected rather than when earned, and benefit payments and administration expenses are recognized when paid rather than when incurred. Investments are reported at fair value or contract value. Consequently, contributions receivable, accrued interest, dividends receivable and accrued expenses are not included in the financial statements. 2. Investment Valuation and Income Recognition Investments, other than the Fidelity Fixed Fund, are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Church s Investment Committee determines the Plan s valuation policies utilizing information provided by the Administrator. See Note D for discussion of fair value measurements. Fully benefit-responsive investment contracts held in the Fidelity Fixed Fund (the Fixed Fund) are reported at contract value in the statements of net assets available for benefits. These underlying investments, which are comprised of high quality fixed income securities, are held in various separate accounts that are wrapped by synthetic investment contracts issued by high quality financial institutions. Contract value is the relevant measurement attribute as these investment contracts are fully benefit-responsive. Contract value is the amount plan participants would receive if they were to initiate permitted transactions under the terms of the Plan. The statements of changes in net assets available for benefits - modified cash basis is presented on a contract value basis (See Note C). Net appreciation in the fair value of investments represents the net realized gains and the net unrealized appreciation of investments. Realized gains are the difference between the proceeds and either the cost of investments sold, determined on an average cost basis. Net unrealized appreciation is the change in the difference between fair value and the cost of investments or the fair value at the end of the previous year, whichever is applicable. 12

13 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Investment Risks The Plan invests in mutual funds and a fully benefit-responsive synthetic guaranteed investment contract (GIC), which holds various securities that may include U.S. government securities, corporate fixed income securities, and mortgage backed securities. Investment securities, in general, are exposed to various risks such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants account balances and the amounts reported in the statements of net assets available for plan benefits - modified cash basis. 4. Concentration of Credit Risk From time to time, the Plan may maintain cash balances in excess of the Federal Deposit Insurance Company (FDIC) insurance limits. Management evaluates the financial stability of these financial institutions and considers the risk to be minimal. At September 30, 2017 and 2016, the Plan had approximately $955,000 and $203,000, respectively, in excess of FDIC insured limits. 5. Notes Receivable from Participants Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent notes are reclassified as distributions based upon the terms of the Plan document. 6. Payment of Benefits Upon separation of employment due to termination of employment, death, disability or retirement, participants may, at their election, withdraw their benefits as a lump sum payment or maintain their balance in the Plan. If the value of a separated participant s balance does not exceed $1,000, the Plan can cause the balance to be either transferred to an individual qualified retirement account or distributed to the separated participant directly. Participants are permitted withdrawals from their Plan accounts for financial hardships. Hardship withdrawals must be approved by the Trustee. 13

14 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 7. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 8. Subsequent Events The Plan has evaluated subsequent events through February 23, 2018, which is the date these financial statements were available to be issued. NOTE C - FULLY BENEFIT-RESPONSIVE INVESTMENT CONTRACTS The Plan s Fixed Fund invests in fully benefit-responsive synthetic guaranteed investment contracts (GIC). A synthetic GIC is an investment contract issued by an insurance company or other financial institution (wrap agreement), backed by a portfolio of various fixed income securities that are owned directly by the Plan. The realized and unrealized gains and losses on the underlying assets are not reflected immediately in the value of the contract, but rather are amortized, usually over time to maturity or the duration of the underlying investments, through adjustments to the future interest crediting rate. The statements of net assets available for benefits - modified cash basis present the fully benefit-responsive investment contract at contract value. Contract value represents contributions made under the contract, plus earnings, less participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal of all or a portion of their investment at contract value. The Fixed Fund could be limited in its ability to transact at contract value if the Fixed Fund raises its risk profile or is subjected to a period of significant cash outflow. The Fixed Fund maintains strong risk parameters, internal cash flow, and a maturity ladder of investments to offset cash withdrawals. Further, the manager of the Fixed Fund may limit withdrawals in order to maintain sufficient liquidity. The Trustee does not believe that any events which would limit the Plan s ability to transact at contract value are probable of occurring. 14

15 NOTE D - FAIR VALUE MEASUREMENTS ASC 820, Fair Value Measurements, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described as follows: Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the plan has the ability to access. Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets Quoted prices for identical or similar assets or liabilities in inactive markets Inputs other than quoted prices that are observable for the asset or liability Inputs that are derived principally from or corroborated by observable market data by correlation or other means If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset s or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. There have been no changes in the methodologies used at. The following is a description of the valuation methodologies used for assets measured at fair value: Mutual funds - Valued based on quoted market prices. The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 15

16 NOTE D - FAIR VALUE MEASUREMENTS - Continued The following table sets forth, by level within the fair value hierarchy, the Plan s assets at fair value as of September 30, 2017: Level 1 Level 2 Level 3 Total Mutual funds $ 400,622,463 $ - $ - $ 400,622,463 The following table sets forth, by level within the fair value hierarchy, the Plan s assets at fair value as of September 30, 2016: Level 1 Level 2 Level 3 Total Mutual funds $ 343,770,806 $ - $ - $ 343,770,806 NOTE E INCOME TAX STATUS The Plan has been designed to qualify under Section 403(b) of the IRC. The terms of the Plan have been prepared to conform to the sample language provided by the Internal Revenue Service (IRS) in Revenue Procedure The Trustee intends to apply for a determination letter on the Plan once the IRS opens such a program. The Plan is required to operate in conformity with the IRC to maintain the tax-exempt status for plan participants under Section 403(b). The Trustee believes that the Plan is currently designed and operating in accordance with the applicable requirements of Section 403(b) of the IRC and, therefore, believes the Plan is qualified and the related custodial accounts are tax-exempt. Therefore, no provision for income taxes has been included in the Plan s financial statements. Accounting principles generally accepted in the United States of America require plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the organization has taken an uncertain position that more than likely would not be sustained upon examination by the IRS. The Trustee has analyzed the tax positions taken by the Plan and has concluded that as of, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. 16

17 NOTE F - PLAN TERMINATION Although it has not expressed any intent to do so, the Trustee has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the terms of the plan agreement. In the event of termination of the Plan, the Trustee shall pay and discharge all expenses and, unless the Trustee elects to continue the Trust, all benefits will be payable as soon as is administratively feasible under the terms of the Plan. The Trustee may either distribute the remaining assets of the Trust or liquidate them and distribute the net proceeds to the participants in accordance with their respective account balances. NOTE G - EXCESS CONTRIBUTIONS To comply with IRS contribution limits, the Plan was required to refund a portion of contributions made by certain participants during prior Plan years. The amounts due to the participants were $53,000 at September 30, 2017 and September 30, At September 30, 2017 the Plan Sponsor and its legal counsel were in the process of remediation to distribute the amounts back to participants. The amounts are expected to be refunded or recoded subsequent to September 30, NOTE H - RELATED PARTIES The Board of Pensions and Benefits USA of the Church of the Nazarene, Inc. has been designated as the Trustee on behalf of the Church. Certain employees of the Trustee provide administrative services to the Plan. Administrative expenses, such as recordkeeping fees, are paid by the Plan. Certain recordkeeping fees are paid back to the Fund in the form of administrative fees income. The Fund also provides funding in the form of APS amounts as determined by the Trustee. 17