ERISA also required pension funding, to avoid the problem that arose when Studebaker Corp. failed and left thousands without pensions. ERISA also established the Pension Benefit Guaranty Corp. (PBGC) - similar to the Federal Deposit Insurance Corp., but for pensions - to guarantee some (not all) of a pension if an employer was bankrupt.
So employers now had to vest benefits, fund them, and guarantee shortfalls. The accountants took a look at these promises and decided that the pension shortfalls had to be disclosed on the balance sheet. As a result, the financials of the employer would be affected by an underfunded pension plan. Furthermore, as assets rose and fell with the market, the "pension liability" would also rise and fall, adding volatility to the financials.
Rise of the 401(k)
Meanwhile, the 401(k) plan became available. No minimum funding requirements. No actuaries or PBGC premiums. And no guarantees. Younger employees didn't appreciate traditional pension plans because of hefty returns in their 401(k) accounts, and a pension that couldn't be collected for years seemed illusory. The pension plan was a drag on turnover - it shackled older workers and was worthless in recruiting.
The cash-balance plan was designed to save the old pension plan by changing the monthly benefit to a cash-based account that could be used to "buy" an annuity at retirement or paid at termination. This made it easier for younger employees to perceive value and offered more mobility to older employees. But the plaintiffs' bar attacked these plans as age-discriminatory. The resulting wave of litigation killed the cash-balance plan as an attractive alternative, even though employers won most of the lawsuits.
Meanwhile, as younger employees were demanding cash-type benefits - such as the 401(k) - the regulatory burden of the traditional pension plan kept growing. Waves of bankruptcies led to a growing PBGC deficit, resulting in higher funding obligations and higher PBGC premiums (soon to be at least $50 per head - $50,000 per year for a modest plan of 1,000 participants). Investors' focus on post-retirement promises kept growing. And statutory limits on pension benefits for highly compensated executives were repeatedly lowered, forcing them into non-qualified plans for the bulk of their post-retirement compensation, and leaving them less interested in the future of the tax-qualified pension plans covering the lower-paid workforce.
Plenty of upside
The result of all of these demographic, financial, and regulatory pressures was unsurprising: There was no downside to freezing the pension plan and replacing it with a 401(k) plan. There was, however, plenty of upside.
The change was good for investors and for executives. It simplified personnel administration, reduced administrative costs, and made recruiting new employees easier.
Is that good? Some say yes, some say no, but it's clear to me that the executives making these decisions are not the greedy, insensitive, overpaid bad guys portrayed in the popular press. In every case, in my experience, the decisions were painful, thoughtfully considered, and deemed to be essential to the ongoing health of the enterprise and better for the majority of employees.
More companies are now moving to automatic enrollment in their 401(k) plans, and to automatic escalation of contribution amounts, which has been an effective approach to increasing employee savings. Employees no longer stay with the same employer for their entire careers, and in a mobile-workforce environment, the traditional pension plan benefits very few. The 401(k) plan, with all its faults, has the advantage of benefiting many.
Those whose benefits are reduced because their pension plans terminated in bankruptcy at least have their guaranteed benefits. Before ERISA, they would have had nothing. Those who often change jobs are able to take their 401(k) account with them, so it is there when they need cash - unlike a traditional pension plan, which would provide little for a short-term worker. The problem for these workers is not the 401(k) plan; it is unemployment.
Comes down to jobs
The retirement-planning community continues to address shortfalls in the retirement system resulting from the new 401(k) world. Under consideration is "longevity insurance," which allows a retiree to put a portion of an account into an annuity that starts at an older age. Other approaches would encourage rollovers instead of withdrawals upon job changes.
But nothing will aid retirement security more than the availability of more jobs. Allowing businesses to remain profitable is the best approach to job creation, and bemoaning the decline of the pension plan does nothing to aid that process.
E-mail Susan Hoffman at SHoffman@littler.com.