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Retirement Planning > Retirement Investing

Big Changes Since 1960

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The passage and signing into law of the Pension Protection Act of 2006, which is aimed at pushing companies to shore up their pension plans and ensure workers get their promised retirement benefits–a move that many have hailed as the most comprehensive reform of the American pension system in decades–has once again underscored the continued decline in traditional pensions and the rise in defined-contribution plans as the way of the future.

The new law comes just weeks after a joint conference held by the Employee Benefit Research Institute (EBRI) and the American Association of Retired Persons (AARP), which concluded that the ultimate demise of private-sector defined benefit pensions is now a foregone conclusion.

“In 1960, the traditional defined pension plans covered 23 million individuals, about half of all the private sector workers in the United States,” the EBRI said in a statement. “But in the final years of the 20th century, the trend reversed and by 2006, the decline was dramatic, with employers either freezing or dropping their traditional defined plans.”

Defined benefit plans have become too costly for both public and private sector entities in the U.S., the EBRI states, but at the same time, the defined contribution scheme has yet to gain enough ground to become truly meaningful. As defined benefit plans disappear, then, there is a concurrent need for design changes to 401(k) plans, as well as an understanding by individuals, their employers and the authorities that there is now a greater onus upon individuals to plan for their own health and retirement expenses. This shift away from the long-standing “social compact” between workers, their employers and the government, is actually only just beginning.


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