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The Changing Pension Landscape

In the 1950's and 1960's, stable jobs and long tenure at a single company were the norm, and companies found it advantageous to build pension plans that offered workers a fixed payout upon retirement. The payout in those programs, known as a Defined Benefit, was derived from a formula based on a worker's years of service and average salary in the last few years, with most of the benefits accruing in the final years before retirement.

That changed as workers and their families became much more mobile, changing jobs and regions of the country more frequently. Demand grew for retirement plans that could move with an employee and that accumulated a larger portion of benefits initially, rather than being dependent on the later years of a long career of service.

Corporations embraced the newer plans, which allowed them to make upfront contributions to a retirement account. The newer plans, known as Defined Contribution plans, shifted to employees the burden of investing the money to cover their living expenses at retirement, thereby saving companies the cost of managing that money over an employee's entire life, as well as the cost of premiums for federal pension insurance.

Companies also found that they could trim costs further by cutting the amount they contributed. Now, on average, companies put up less than 50 cents for every dollar set aside by employees, and many companies make their contributions in the form of their own shares, rather than cash.

Companies have not had to work hard to get employees to embrace the new plans. All they had to do was point to the superior long-term returns of the stock market, implicitly promising employees greater benefits at retirement than they could expect from a traditional pension. No small factor in bolstering the popularity of the newer plans was the fact that just as the first 401(k) accounts appeared in 1982, the stock market began an 18-year up swing.

However, the Defined Contribution plans lack the protections of the Defined Benefit plans. The Defined Benefit plans have a guaranteed benefit and federal insurance to protect retirees if the company goes bankrupt. The huge losses on retirement savings of workers at Enron and other troubled companies have focused attention on the vulnerability of the Defined Contribution plans.

In 1998, the most recent year for which the Labor Department has released data, company-sponsored retirement accounts had assets of $4 trillion. About half of those assets were in traditional Defined Benefit pension plans, which enroll roughly 40 million employees, more than half of them still working. The other $2 trillion was in defined-contribution plans, like 401(k)'s, profit sharing and stock-bonus plans, which provide no guaranteed benefit. Over 55 million employees, are covered by those plans, with 88% of those still working.

The new plans are also growing much faster. From their start in 1982, 401(k) plans surged to $1.5 trillion in 1998. Roughly three of every four new dollars invested in corporate retirement plans goes into 401(k)'s, and two out of three active workers who are covered by a retirement plan are responsible for directing the investment of their assets.

According to the most recent data, companies were still the primary contributors to retirement programs of all types in 1998, accounting for 50 percent of new money flowing into the plans. Nearly a decade earlier, in 1989, companies contributed 70 percent. Those percentages include contributions in the form of company stock.

Experts agree, that by the year 2000, workers have surpassed companies as the primary contributors to pension and retirement plans. The shift in who is responsible for financing retirement reflects a broader change in thinking both in the corporate world and society at large. Various studies have found workers are not contributing enough to their accounts to pay for retirement, and they are doing things like borrowing from their accounts, inevitably lowering their potential returns.

Though Congress has taken up retirement policy in the aftermath of Enron, most of the proposed changes involve how much employees have in company stock and when they can move it. Moreover, many big companies, which cover the majority of employees enrolled in retirement programs, have indicated that they oppose all but the smallest changes in the current system.

None of the proposals address some of the more fundamental issues. Less than two-thirds of all working Americans are employed by companies that sponsor a retirement plan, and only 52 percent of all employees participate in retirement or pension plans. Excluding government employees, the numbers are even lower. Only 47 percent of employees have anything other than Social Security awaiting them at retirement.

Call Us: If you have questions about or need assistance with your pension or benefit plan, or would like a copy of one of our fact sheets, call the Pension Rights Project at (800) 474-1116.