Private
pensions are a very recent phenomenon. There were only about a dozen private pensions in
1900. The number grew to about 400 by 1930, mostly in education and in the banking,
insurance and utility industries. Most older workers didn't have pension plans until the
1950s. Oddly enough, it was the passage of the Social Security Act that made private
pensions affordable for employers (who could not afford the full cost of income
replacement but could afford the policies that would supplement Social Security benefits).
The number of plans grew to 112,000 by 1985, although it has since declined to 42,000 in
recent years (now covering 33 million workers and retirees).
The decline in
private pensions comes at the same time 401 (k) plans grew. Unlike pension plans that hold
employers accountable for results, contributory 401 (k) plans hold the employee
responsible for making investment decisions. Since 1996 the number of workers enrolled in
employer sanctioned defined contribution accounts has exceeded those remaining in defined
benefit programs.
There is an
entertaining short history of pension
plans in the United States on Social Security's History web page by former SSA
historian Abe Bortz., and a Detailed
Chronology of the History of Pension Plans as well.
Public policy
interest has recently focused on the possible adaptation of an elective choice in
reforming the Social Security Old Age and Retirement Program. The sites selected here
focus on the government’s role in protecting the pension rights of workers and former
workers and resources for the professional and consumer in asserting individual
rights.
Types of Pension Plans
Generally speaking, there are two
types of pension plans: defined benefit plans and defined contribution plans.
Defined Benefit Plan
A defined benefit plan promises you a
specified monthly benefit at retirement. The plan may state this promised benefit as an
exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may
calculate a benefit through a plan formula that considers such factors as salary and
service -- for example, 1 percent of your average salary for the last 5 years of
employment for every year of service with your employer.
Defined Contribution Plan
A defined contribution plan, on the
other hand, does not promise you a specific amount of benefits at retirement. In these
plans, you or your employer (or both) contribute to your individual account under the
plan, sometimes at a set rate, such as 5 percent of your earnings annually. These
contributions generally are invested on your behalf. You will ultimately receive the
balance in your account, which is based on contributions plus or minus investment gains or
losses. The value of your account will fluctuate due to the changes in the value of your
investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans,
employee stock ownership plans, and profit-sharing plans.
Examples of Defined Benefit
Plans and Defined Contribution Plans
Listed below are specific examples of
defined benefit plans and defined contribution plans.
 |
401(k) Plans
Your
employer may establish a defined contribution plan that is a cash or deferred arrangement,
usually called a 401(k) plan. You can elect to defer receiving a portion of your salary
which is instead contributed on your behalf, before taxes, to the 401(k) plan. Sometimes
the employer may match your contributions. There are special rules governing the operation
of a 401(k) plan.
|
|
Cash Balance Plan
A cash
balance plan is a defined benefit plan that defines the benefit in terms that are more
characteristic of a defined contribution plan. In other words, a cash balance plan defines
the promised benefit in terms of a stated account balance.
The U.S. Department of Labor, Pension and Welfare Benefits Administration provides
additional information about cash benefit plans.
|
|
Employee Stock Ownership (ESOPs)
Employee
stock ownership plans (ESOPs) are a form of defined contribution plan in which the
investments are primarily in employer stock. Congress authorized the creation of ESOPs as
one method of encouraging employee participation in corporate ownership.
|
|
Money Purchase Pension
A money purchase pension plan is a plan
that requires fixed annual contributions from your employer to your individual account.
Because a money purchase pension plan requires these regular contributions, the plan is
subject to certain funding and other rules.
|
|
Profit Sharing Plans/Stock Bonus Plans
A profit sharing or stock bonus plan is a
defined contribution under which the plan may provide, or the employer may determine,
annually, how much will be contributed to the plan (out of profits or otherwise). The plan
contains a formula for allocating to each participant a portion of each annual
contribution. A profit sharing plan or stock bonus plan include a 401(k) plan.
|
|
Simplified Employee Pension Plans
(SEPs)
Your
employer may sponsor a simplified employee pension plan or SEP. SEPs are relatively
uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on
a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs
are subject to minimal reporting and disclosure requirements.
|
Resource and Research Sites
There are many other resources on the
web. Some of these provide free information, while others, like the Employee Benefit
Retirement Institute would like you to join as members for a fee.
FREE
Pension
Rights Center - National Institutes of Health
Benefits Link web site
Pension Action Center
- For residents of New England
FEE
Employee Benefit Retirement
Institute
National
Pension Lawyers Network - Referral Service for pension related litigation
Pension Rights
Action Project - Minnesota
