The pundits, academics, and other prognosticators had a
field day over the past two years, declaring that the
traditional pension plan in the US was dead and the only
remaining formality was the burial. In those instances
where companies had tried to offer workers something in
between (the hybrid "cash balance" plans),
suspicion, hostility, and even lawsuits sometimes followed.
Then, during the first two weeks of August, two events in
rapid succession may have turned the "collective wisdom" on
its collective head. First, the Congress approved sweeping
pension reform legislation and, second, the U.S. Court of
Appeals overturned a lower court ruling that had declared
the IBM "cash balance" pension conversion discriminatory
against older employees. Those decisions on the legislative
and legal fronts may well breathe new life into both
traditional and hybrid defined benefit (DB) pension plans
that some had given up for dead.
The Pendulum Has Swung
Once upon a time, a corporate pension plan in America
was a defined benefit plan. Period. Often forgotten by many
people is the fact that the 401(k) plan was conceived and
introduced as a vehicle to augment, not replace, the DB
plan. DB plans paid a guaranteed annuity based on final
average pay at the time of retirement. In most cases, the
worker received the annuity following a 20- to 30-year
career with the same employer.
Things began to change significantly following enactment
of the Employee Retirement Income Security Act of 1974
(ERISA). In fairly rapid succession, a series of new laws
served to limit the amount of contributions or benefits
that could be paid into or flow out from DB plans.
Importantly, most of these new laws totally ignored any
retirement policy. They were purely revenue-driven. As a
result, the maximum benefit that could be paid, the maximum
salary that could be reflected in a DB plan, and the
maximum tax-deductible contribution a corporation could
make were limited. Not surprisingly, three things happened:
Some companies stopped contributing to their DB plans;
benefits were reduced (especially for executives); and
plans became much more complicated and, therefore, more
costly to administer.
Fast-forward to the "Go-Go" late '80s and early
'90s. Driven by a booming stock market, assets ran up and
DB plans became fully funded. Despite strong earnings and
healthy markets, prudent companies still saw a need to
contribute to their pension plans, given their expectations
of continued growth, the need to provide for new hires,
etc. However, under the existing rules, contributions most
likely would not be tax-deductible and, instead, might be
subject to a 10% excise tax. That prompted many companies
to go on what looked at the time to be a very long
Concurrently, new companies were starting up that didn't
want to take on the administrative burden of DB plans.
Instead, for these companies, awards of shares and future
stock options replaced the traditional defined benefit
As the leaders of this genre (Microsoft, Intel, Dell,
and others) have grown up and become corporate mainstays,
their old-line competitors, especially in the technology
industries, increasingly found themselves on an uneven
playing field, disadvantaged financially by their DB
plansÂ—plans that became increasingly expensive as asset
performance and interest rates nosedived. DB plans suddenly
and rapidly required big contributions.
Another fundamental shift also was under way, this time
on the employee side. The concept of "cradle to grave"
service at one employer was evaporating rapidly. Sometimes
induced by layoffs or downsizing, sometimes pursued as
career advancement, "job-hopping" had lost its old stigma.
With a potential "benefits gap" for job-hoppers at
retirement, the traditional DB plans designed for
career-service with one employer were no longer attractive
to the suddenly mobile workforce.