ERISA'S ROLE IN THE DEMISE OF DEFINED BENEFIT PENSION PLANS IN THE UNITED STATES

Abstract

In the decade or so following World War II, employer-provided pension plans became common in private-sector employment in the United States. The prevalent type was the defined benefit (DB) plan, which typically provides the employee and his or her spouse with a lifetime retirement income, paid monthly, based upon a formula that commonly takes account of the employee's compensation and length of service with the employer. Another type, the defined contribution (DC) plan, was also in use, mostly as a second and supplementary plan for highly compensated employees. A DC plan is a savings program, often tax-favored, which provides an account for each participating employee, funded mainly by salary reduction contributions that the employee authorizes together with contributions from the employer and the investment experience on the account. Subject to age and other criteria required under the Internal Revenue Code and the plan's terms, the employee and spouse decide when and in what amounts to draw down on the account in retirement. If at the death of the survivor of them the DC account contains undistributed funds, that balance will pass to heirs or other beneficiaries. Into the early 1980s, DB plans covered about 85 percent of private-sector employees who had any pension coverage. In the years since, employers have retreated from offering DB plans, by terminating existing plans or closing ("freezing") them to new participants, while also ceasing to establish new DB plans. By 2003, only 33 percent of large employers provided DB plans. By 2015, only 3 percent of Fortune 500 employers offered traditional DB plans to newly hired employees. The "de-risking" wave, discussed below in Part III, is further diminishing the extent of the DB system. This article explores the question of what has caused this spectacular abandonment. The conventional understanding, summarized in Part II, attributes the demise of the DB system to large changes in economic conditions and employment patterns, together with the emergence of a viable DC alternative, the 401(k) plan. This article contends that the conventional account is incomplete, because it neglects the role of ERISA, the 1974 federal pension regulatory statute, in making DB plans too burdensome for employers to sustain. Part III discusses features of ERISA that have deterred employers from establishing or maintaining DB plans. Together with the changes reviewed in Part II, ERISA--although meant to promote DB plans--has had the effect of destroying the DB system in the United States.