Retirement Plans In The United States
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A retirement plan is a financial arrangement designed to replace
employment Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
income upon
retirement Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload. Many people choose to retire when they are elderly or incapable of doing their j ...
. These plans may be set up by employers, insurance companies,
trade union A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...
s, the
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
, or other institutions.
Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of a ...
has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
and the plans are regulated by the
Department of Labor The Ministry of Labour ('' UK''), or Labor ('' US''), also known as the Department of Labour, or Labor, is a government department responsible for setting labour standards, labour dispute mechanisms, employment, workforce participation, training, a ...
under the provisions of the
Employee Retirement Income Security Act The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax eff ...
(ERISA).


Types of retirement plans

Retirement plans are classified as either
defined benefit plans A definition is a statement of the meaning of a term (a word, phrase, or other set of symbols). Definitions can be classified into two large categories: intensional definitions (which try to give the sense of a term), and extensional definitio ...
or defined contribution plans, depending on how benefits are determined. In a defined benefit (or
pension A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
) plan, benefits are calculated using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan. Separate accounts for each participant do not exist. By contrast, in a defined contribution plan, each participant has an account, and the benefit for the participant is dependent upon both the amount of money contributed into the account and the performance of the investments purchased with the funds contributed to the account. Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution schemes.


Defined contribution plans

According to Internal Revenue Cod
Section 414
a defined contribution plan is an employer-sponsored plan with an individual account for each participant. The accrued benefit from such a plan is solely attributable to contributions made into an individual account and investment gains on those funds, less any losses and expense charges. The contributions are invested (''e.g.'', in the stock market), and the returns on the investment are credited to or deducted from the individual's account. Upon retirement, the participant's account is used to provide retirement benefits, often through the purchase of an
annuity In investment, an annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, ...
. Defined contribution plans have become more widespread over recent years and are now the dominant form of plan in the private sector. The number of defined benefit plans in the U.S. has been steadily declining, as more employers see pension funding as a financial risk they can avoid by freezing the plan and instead offering a defined contribution plan. Examples of defined contribution plans include
individual retirement account An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's ear ...
(IRA), 401(k), and
profit sharing plan A profit-sharing agreement for pensions, typically in the United States, is an agreement that establishes a pension plan maintained by the employer to share a portion of its profits with its employees. History A profit-sharing agreement used to ...
s. In such plans, the participant is responsible for selecting the types of
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
s toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s to selecting individual
stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s or other
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
. Most self-directed retirement plans are characterized by certain
tax advantage Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education savi ...
s. The funds in such plans may not be withdrawn without penalty until the investor reaches retirement age, which is typically the year in which taxpayer reaches 59.5 years of age. Money contributed can be from employee salary deferrals, employer contributions, or
employer matching contribution In the United States, an employer matching program is an employer's potential payment to their 401(k) plan that depends on participating employees' contribution to the plan. Background An employee's 401(k) plan is a retirement savings plan. The ...
s. Defined contribution plans are subject to Internal Revenue Cod
Section 415
limits on how much can be contributed. As of 2015, the total deferral amount including the employee and employer contribution is capped at $53,000. The employee-only amount is $18,000 for 2015, but a plan can permit participants who are age 50 or older to make "catch-up" contributions of up to an additional $6,000.


Defined benefit plans

Commonly referred to as a
pension A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
in the US, a defined benefit plan pays benefits from a trust fund using a specific formula set forth by the plan sponsor. In other words, the plan ''defines a benefit'' that will be paid upon retirement. The statutory definition of ''defined benefit'' encompasses all pension plans that are not defined contribution and therefore do not have individual accounts. While this catch-all definition has been interpreted by the courts to capture some hybrid pension plans like cash balance (CB) plans and pension equity plans (PEP), most pension plans offered by large businesses or
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
agencies are ''final average pay'' (FAP) plans, under which the monthly benefit is equal to the number of years worked multiplied by the member's salary at retirement multiplied by a factor known as the ''accrual rate''. At a minimum, benefits are payable in ''normal form'' as a Single Life Annuity (SLA) for single participants or as a Qualified Joint and Survivor Annuity (QJSA) for married participants. Both normal forms are paid at Normal Retirement Age (usually 65) and may be actuarially adjusted for early or late commencement. Other optional forms of payment, such as lump sum distributions, may be available but are not required. The
cash balance plan A cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan. The hypothetical nature of the individual accounts was crucial in the early adoption of such plans ...
typically offers a lump sum at and often before normal retirement age. However, as is the case with all defined benefit plans, a cash balance plan must also provide the option of receiving the benefit as a life annuity. The amount of the annuity benefit must be ''definitely determinable'' as per IR
regulation 1.412-1
Defined benefit plans may be either ''funded'' or ''unfunded''. In a funded plan, contributions from the employer and participants are invested into a trust fund dedicated solely to paying benefits to retirees under a given plan. The future returns on the investments and the future benefits to be paid are not known in advance, so there is no guarantee that a given level of contributions will meet future obligations. Therefore, fund assets and liabilities are regularly reviewed by an actuary in a process known as valuation. A defined benefit plan is required to maintain adequate funding if it is to remain qualified. In an unfunded plan, no funds are set aside for the specific purpose of paying benefits. The benefits to be paid are met immediately by contributions to the plan or by general assets. Most government-run retirement plans, including
Social Security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
, are unfunded, with benefits being paid directly out of current taxes and Social Security contributions. Most nonqualified plans are also unfunded.


Hybrid and cash balance plans

Hybrid plan designs combine the features of defined benefit and
defined contribution plan A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these a ...
designs. In general, they are treated as
defined benefit plans A definition is a statement of the meaning of a term (a word, phrase, or other set of symbols). Definitions can be classified into two large categories: intensional definitions (which try to give the sense of a term), and extensional definitio ...
for tax, accounting, and regulatory purposes. As with defined benefit plans, investment risk is largely borne by the plan sponsor. As with defined contribution designs, plan benefits are expressed in the terms of a notional ''account balance'', and are usually paid as cash balances upon termination of employment. These features make them more portable than traditional defined benefit plans and perhaps more attractive to a highly mobile workforce. A typical hybrid design is the
cash balance plan A cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan. The hypothetical nature of the individual accounts was crucial in the early adoption of such plans ...
, where the employee's notional account balance grows by some defined rate of interest and annual employer contribution. In the United States, conversions from traditional plan to hybrid plan designs have been controversial. Upon conversion, plan sponsors are required to retrospectively calculate employee account balances, and if the employee's actual vested benefit under the old design is more than the account balance, the employee enters a period of ''wear away''. During this period, the employee would be eligible to receive the already accrued benefit under the old formula, but all future benefits are accrued under the new plan design. Eventually, the accrued benefit under the new design exceeds the grandfathered amount under the old design. To the participant, however, it appears as if there is a period where no new benefits are accrued. Hybrid designs also typically eliminate the more generous early retirement provisions of traditional pensions. Because younger workers have more years in which to accrue interest and pay credits than those approaching retirement age, critics of cash balance plans have called the new designs discriminatory. On the other hand, the new designs may better meet the needs of a modern workforce and actually encourage older workers to remain at work, since benefit accruals continue at a constant pace as long as an employee remains on the job. As of 2008, the courts have generally rejected the notion that cash balance plans discriminate based on age, while the
Pension Protection Act of 2006 The Pension Protection Act of 2006 (), 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006. Pension reform This legislation requires companies who have underfunded their pension plans to pay higher premiums to ...
offers relief for most hybrid plans on a prospective basis. Although a cash balance plan is technically a defined benefit plan designed to allow workers to evaluate the economic worth their pension benefit in the manner of a defined contribution plan (''i.e.'', as an account balance), the ''target benefit'' plan is a defined contribution plan designed to express its projected impact in terms of lifetime income as a percent of final salary at retirement (''i.e.,'' as an annuity amount). For example, a target benefit plan may mimic a typical defined benefit plan offering 1.5% of salary per year of service times the final 3-year average salary. Actuarial assumptions like 5% interest, 3% salary increases and the UP84 Life Table for mortality are used to calculate a level contribution rate that would create the needed lump sum at retirement age. The problem with such plans is that the flat rate could be low for young entrants and high for old entrants. While this may appear unfair, the skewing of benefits to the old worker is a feature of most traditional defined benefit plans, and any attempt to match it would reveal this backloading feature.


Requirement of permanence

To guard against tax abuse in the United States, the
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
(IRS) has promulgated rules that require that pension plans be permanent as opposed to a temporary arrangement used to capture tax benefits. Regulation 1.401-1(b)(2) states that " us, although the employer may reserve the right to change or terminate the plan, and to discontinue contributions thereunder, the abandonment of the plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. Especially will this be true if, for example, a pension plan is abandoned soon after pensions have been fully funded for persons in favor of whom discrimination is prohibited..." The IRS would have grounds to disqualify the plan retroactively, even if the plan sponsor initially got a favorable determination letter.


Qualified retirement plans

Qualified plans receive favorable tax treatment and are regulated by ERISA. The technical definition of ''qualified'' does not agree with the commonly used distinction. For example, 403(b) plans are not considered qualified plans, but are treated and taxed almost identically. The term ''qualified'' has special meaning regarding defined benefit plans. The
IRS The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...
defines strict requirements a plan must meet in order to receive favorable tax treatment, including: * A plan must offer life annuities in the form of a Single Life Annuity (SLA) and a Qualified Joint & Survivor Annuity (QJSA). * A plan must maintain sufficient funding levels. * A plan must be administered according to the plan document. * Benefits are required to commence at retirement age (usually age 65 if no longer working, or age 70 1/2 if still employed). * Once earned, benefits may not be forfeited. * A plan may not discriminate in favor of highly compensated employees. * A plan must be insured by the
PBGC The Pension Benefit Guaranty Corporation (PBGC) is a United States federally chartered corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined b ...
. Failure to meet IRS requirements can lead to plan disqualification, which carries with it enormous tax consequences.


SIMPLE IRAs

A
SIMPLE IRA A Savings Incentive Match Plan for Employees Individual Retirement Account, commonly known by the abbreviation "SIMPLE IRA", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money ...
is a type of Individual Retirement Account (IRA) that is provided by an employer. It is similar to a 401(k) but offers simpler and less costly administration rules. Like a 401(k) plan, the SIMPLE IRA is funded by a pre-tax salary reduction. However, contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans.


SEP IRAs

A Simplified Employee Pension Individual Retirement Account, or
SEP IRA A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for themselves and their ...
, is a variation of the Individual Retirement Account. SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration costs for self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. Because SEP accounts are treated as IRAs, funds can be invested the same way as is the case for any other IRA.


Keogh or HR10 plans

Keogh plan Keogh plans are a type of retirement plan for self-employed people and small businesses in the United States. History Named for U.S. Representative Eugene James Keogh of New York, they are sometimes called HR10 plans. IRS Publication 560 refer ...
s are full-fledged pension plans for the self-employed. Named for U.S. Representative Eugene James Keogh of New York, they are sometimes called HR10 plans.


Nonqualified plans

Plans that do not meet the guidelines required to receive favorable tax treatment are considered ''nonqualified'' and are exempt from the restrictions placed on qualified plans. They are typically used to provide additional benefits to key or highly paid employees, such as executives and officers. Examples include SERP (Supplemental Executive Retirement Plans) and 457(f) plans.


Contrasting types of retirement plans

Advocates of Defined contribution plan point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts.


Portability and valuation

Defined contribution plans have actual balances of which workers can know the value with certainty by simply checking the record of the balance. There is no legal requirement that the employer allow the former worker take his money out to roll over into an IRA, though it is relatively uncommon in the U.S. not to allow this (and many companies such as Fidelity run numerous TV ads encouraging individuals to transfer their old plans into current ones). Because the lump sum actuarial present value of a former worker's vested accrued benefit is uncertain, the IRS, under section 417(e) of the Internal Revenue Code, specifies the interest and mortality figures that must be used. This has caused some employers as in the Berger versus Xerox case in the 7th Circuit (Richard A. Posner was the judge who wrote the opinion) with cash balance plans to have a higher liability for employers for a lump sum than was in the employee's "notional" or "hypothetical" account balance. When the interest credit rate exceeds the mandated section 417(e) discounting rate, the legally mandated lump sum value payable to the employee
f the plan sponsor allows for pre-retirement lump sums F, or f, is the sixth Letter (alphabet), letter in the Latin alphabet, used in the English alphabet, modern English alphabet, the alphabets of other western European languages and others worldwide. Its name in English is English alphabet#Let ...
would exceed the notional balance in the employee's cash balance account. This has been colourfully dubbed the "Whipsaw" in actuarial parlance. The Pension Protection Act signed into law on August 17, 2006 contained added provisions for these types of plans allowing the distribution of the cash balance account as a lump sum.


Portability: practical difference, not a legal difference

A practical difference is that a defined contribution plan's assets generally remain with the employee (generally, amounts contributed by the employee and earnings on them remain with the employee, but employer contributions and earnings on them do not vest with the employee until a specified period has elapsed), even if he or she transfers to a new job or decides to retire early. By contrast, in many countries defined benefit pension benefits are typically lost if the worker fails to serve the requisite number of years with the same company. Self-directed accounts from one employer may usually be 'rolled-over' to another employer's account or converted from one type of account to another in these cases. Because defined contribution plans have actual balances, employers can simply write a check because the amount of their liability at termination of employment which may be decades before actual normal (65) retirement date of the plan is known with certainty. There is no legal requirement that the employer allow the former worker take his money out to roll over into an IRA, though it is relatively uncommon in the US not to allow this. Just as there is no legal requirement to give ''portability'' to a
Defined contribution plan A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these a ...
, there is no mandated ban on portability for
defined benefit plan Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age ...
s. However, because the lump sum actuarial present value of a former worker's vested accrued benefit is uncertain, the mandate under in section 417(e) of the Internal Revenue Code specifies the interest and mortality figures that must be used. This uncertainty has limited the practical portability of defined benefit plans.


Investment risk borne by employee or employer

It is commonly said that the employee bears investment risk for defined contribution plans, while the employer bears that risk in defined benefit plans. This is true for practically all cases, but pension law in the United States does not require that employees bear investment risk. The law only provides a section 404(c) exemption under ERISA from
fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
liability if the employer provides the mandated investment choices and gives employees sufficient control to customize his pension investment portfolio appropriate to his risk tolerance.


PBGC insurance: a legal difference

ERISA does not provide insurance from the
Pension Benefit Guaranty Corporation The Pension Benefit Guaranty Corporation (PBGC) is a United States federally chartered corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined b ...
(PBGC) for defined contribution plans, but cash balance plans do get such insurance because they, like all ERISA-defined benefit plans, are covered by the PBGC. Plans may also be either employer-provided or individual plans. Most types of retirement plans are employer-provided, though
individual retirement account An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's ear ...
s (IRAs) are very common.


Tax advantages

Most retirement plans (the exception being most non qualified plans) offer significant tax advantages. Most commonly the money contributed to the account is not taxed as income to the employee at the time of the contribution. In the case of employer provided plans, however, the employer is able to receive a tax deduction for the amount contributed as if it were regular employee compensation. This is known as ''pre-tax'' contributions, and the amounts allowed to be contributed vary significantly among various plan types. The other significant advantage is that the assets in the plan are allowed to grow through
investing Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
without the taxpayer being taxed on the annual growth year by year. Once the money is withdrawn it is taxed fully as income for the year of the withdrawal. There are many restrictions on contributions, especially with 401(k) and defined benefit plans. The restrictions are designed to make sure that highly compensated employees do not gain too much tax advantage at the expense of lesser paid employees. Currently two types of plan, the
Roth IRA A Roth IRA is an individual retirement account (IRA) under United States law that is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement pla ...
and the
Roth 401(k) The Roth 401(k) is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan. Sinc ...
, offer tax advantages that are essentially reversed from most retirement plans. Contributions to Roth IRAs and Roth 401(k)s must be made with money that has been taxed as income. After meeting the various restrictions, withdrawals from the account are received by the taxpayer tax-free.


EGTRRA and later changes

The
Economic Growth and Tax Relief Reconciliation Act of 2001 The Economic Growth and Tax Relief Reconciliation Act of 2001 was a major piece of tax legislation passed by the 107th United States Congress and signed by President George W. Bush. It is also known by its abbreviation EGTRRA (often pronounced ...
(EGTRRA) brought significant changes to retirement plans, generally easing restrictions on the ability of the taxpayer to roll money from one type of account to the other, and increasing contributions limits. Most of the changes were designed to phase in over a period of 4 to 10 years.


History of pensions in the United States

*1717: The Presbyterian Church creates a Fund for Pious Uses to provide for retired ministers.Annual Report of the Board of Pensions, PCUSA, 2009, http://web.pensions.org/Publications/pensions/Home/Forms%20%26%20Publications/Booklets%20%26%20Brochures/AnnualReport2009.pdf * 1884: Baltimore and Ohio Railroad establishes the first pension plan by a major employer, allowing workers at age 65 who had worked for the railroad for at least 10 years to retire and receive benefits ranging from 20 to 35% of wages. * 1889: The American Express Company creates the first pension plan in the United States. * The Revenue Act of 1913, passed following the passage of the 16th amendment to the constitution which permitted income taxation, recognized the tax exempt nature of pension trusts. At the time, several large pension trusts were already in existence- including the pension trust for ministers of the Anglican Church in the United States. *1924: The Presbyterian Church, USA, creates its current pension program * 1940s:
General Motors The General Motors Company (GM) is an American Multinational corporation, multinational Automotive industry, automotive manufacturing company headquartered in Detroit, Michigan, United States. It is the largest automaker in the United States and ...
chairman
Charles Erwin Wilson Charles Erwin Wilson (July 18, 1890 – September 26, 1961) was an American engineer and businessman who served as United States Secretary of Defense from 1953 to 1957 under President Dwight D. Eisenhower. Known as "Engine Charlie", he was pre ...
designed GM's first modern pension fund. He said that it should invest in all
stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s, not just GM. * 1963:
Studebaker Studebaker was an American wagon and automobile manufacturer based in South Bend, Indiana, with a building at 1600 Broadway, Times Square, Midtown Manhattan, New York City. Founded in 1852 and incorporated in 1868 as the Studebaker Brothers M ...
terminated its underfunded pension plan, leaving employees with no
legal recourse A legal recourse is an action that can be taken by an individual or a corporation to attempt to remedy a legal difficulty. * A lawsuit if the issue is a matter of civil law * Contracts that require mediation or arbitration before a dispute can go ...
for their pension promises. * 1974: ERISA – imposed reporting and disclosure obligations and minimum standards for participation, vesting, accrual and funding on U.S. plan sponsors, established
fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
standards applicable to plan administrators and asset managers, established the
Pension Benefit Guaranty Corporation The Pension Benefit Guaranty Corporation (PBGC) is a United States federally chartered corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined b ...
(PBGC) to ensure benefits for participants in terminated defined benefit plans, updated the Internal Revenue Code rules for tax qualification, and authorized Employee Stock Ownership Plans ("ESOPs") and Individual Retirement Accounts ("IRAs"). Championed by Senators Jacob K. Javits, Harrison A. Williams, Russell Long, and Gaylord Nelson, and by Representatives John Dent and John Erlenborn. * 1985: The First Cash Balance Plan - Kwasha Lipton creates it by amending the plan document of
Bank of America The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank w ...
pension plan. The linguistic move was to avoid mentioning actual individual accounts but using the words ''hypothetical account'' or ''notional account''. * 1991: A Magazine article claims that pension- and retirement funds own 40% of American
common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Com ...
and represent $2.5
trillion ''Trillion'' is a number with two distinct definitions: * 1,000,000,000,000, i.e. one million million, or (ten to the twelfth power), as defined on the short scale. This is now the meaning in both American and British English. * 1,000,000,000,0 ...
in assets. * Growth and Decline of
Defined Benefit Pension Plan Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age ...
s in the United States. In 1980 there were approximately 250,000 qualified defined benefit pension plans covered by the
Pension Benefit Guaranty Corporation The Pension Benefit Guaranty Corporation (PBGC) is a United States federally chartered corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined b ...
. By 2005, there are less than 80,000 qualified plans. * Fewer and Fewer: Defined benefit plans continue to dwindle, becoming exception rather than rule. As of 2011, only 10% of private employers offered pension plans, accounting for 18% of the private workforce.{{Cite journal, last=Wiatrowski, first=William J., date=December 2012, title=The last private industry pension plans: a visual essay, url=http://www.bls.gov/opub/mlr/2012/12/art1full.pdf, journal=Monthly Labor Review, access-date=2016-09-02


See also

*
Retirement plan A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
*
Individual retirement account An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's ear ...
(IRA) *
Public employee pension plans in the United States In the United States, public sector pensions are offered at the federal, state, and local levels of government. They are available to most, but not all, public sector employees. These employer contributions to these plans typically vest after so ...
* 401(k) * 403(b) - Similar to the 401(k), but for educational, religious, public healthcare, or non-profit workers * 401(a) and 457 plans - For employees of state and local governments and certain tax-exempt entities *
Roth IRA A Roth IRA is an individual retirement account (IRA) under United States law that is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement pla ...
- Similar to the IRA, but funded with after-tax dollars, with distributions being tax-free *
Roth 401(k) The Roth 401(k) is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan. Sinc ...
- Introduced in 2006; a 401(k) plan with the tax features of a Roth IRA


References


External links


IRS Retirement Plans Community siteWest's Law Encyclopedia entry on pension at www.enotes.comDifferent Types of Retirement Plans Comparison
NerdWallet June 29 2016
Official U.S. Government WebsitePublications
from the U.S. Department of Labor, which include those on retirement plans