Can This Pension System Be Saved?

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U.S. employers seem to be celebrating the 30th anniversary of the Employee Retirement Income Security Act of 1974 by putting more nails in the traditional pension system’s coffin.

Officials at the Pension Benefit Guaranty Corp., a mandatory pension benefit insurance program, hope changes in laws, regulations and marketing strategies will revive the market for traditional defined benefit plans.

A solid pension plan is a great vehicle for increasing workers’ retirement income security, and the recent stock market slump reminded everyone of the value of benefit guarantees, PBGC officials argue.

But retirement plan experts interviewed say there is no easy way to turn back time, especially in the market for midsize retirement plans.

Although inertia has saved defined benefit plans at many big companies, and tax breaks have induced owners of some small companies to set up defined benefit plans, “I have not seen [a new defined benefit plan] go beyond 10 employees in years,” says Scott Betts, vice president of operations at National Benefit Services Inc., Sandy, Utah.

Betts reports that he recently helped shut down one sponsor’s last defined benefit plan because the sponsor was worried about investment market volatility.

A company that sponsors a traditional defined benefit pension plan sets aside a certain amount of cash to back up benefits obligations.

When President Gerald Ford signed the bill that brought ERISA to life in 1974, he wanted to make sure that pension plan sponsors contributed enough cash, and he also wanted plan fiduciaries to manage the plan assets carefully.

ERISA begat the PBGC. ERISA itself and the PBGC’s own rules require sponsors of defined benefit plans to pay premiums to the PBGC and meet many plan administration requirements. In return, the PBGC provides some protection for members of plans that fail.

Richard Berner, chief U.S. economist at Morgan Stanley & Company Inc., New York, says the defined benefit pension system is worth saving because defined benefit plans offer 3 characteristics that often are absent from other retirement products: pooling of risk, professional asset management and deferral of income.

The gyrations of the stock market have increased the allure of defined benefits, and so has the fact that many baby boomers are approaching retirement age, says Virginia Wentz, an advisor with Stephen H. Rosen & Associates, Haddonfield, N.J., who specializes in helping entities with 1 to 50 employees.

But the number of PBGC-insured single-employer plans fell to 29,500 in 2003, from 112,000 in 1985, according to the PBGC. Only 17% of American workers now participate in defined benefit pension plans, down from 44% in 1974. Meanwhile, the share of workers participating in defined contribution retirement plans has risen to 48%.

The benefits provided by 401(k) plans and other defined contribution plans are not PBGC-insured, but young workers often prefer defined contribution plans because the plans offer portable, clearly visible benefits, according to Dallas Salisbury, president of the Employee Benefit Research Institute, Washington.

“While people say the idea of a monthly income stream from retirement is attractive, when confronted with a payout decision, they will lean toward lump sums,” says Anna Rappaport, a principal in the Chicago office of Mercer Human Resources Consulting.

“While a defined benefit plan is purely employer paid, the value to the employee is not always very well understood,” says Wentz, the New Jersey advisor.

But experts say employers? concerns about defined benefit plans are partly responsible for the shift to 401(k) plans.

The securities analysts who follow large, publicly traded companies see defined benefit plans as liability time bombs, Salisbury says.