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The years of work you put in were supposed to mean comfort and safety in your golden years.

The History of Pensions

In early America, prior to the industrial revolution, most people lived and worked on farms or as craftsmen practicing a trade. With the rise of manufacturers, employers wanted to attract and retain long-time workers while also incentivizing them to eventually retire and make room for incoming, younger workers.  The first private pension plan established in the United States was created by the American Express Company in 1875. Other companies began to follow suit, offering their own defined benefit plans – plans that paid workers a specific monthly benefit when they retired, typically funded entirely by the employers.

With companies competing for a limited supply of workers, the pay was one factor in attracting employees, but pension offerings are what convinced the workers to stick around for the long-term instead of changing to a different employer. These early plans, though, typically had very long vesting terms, about 20 years or more.

When ERISA was passed in 1974, the predominant form of the pension plan was the defined benefit (DB) plan, which provides, for employees who have worked a sufficient number of years for their pensions to “vest,” a set monthly benefit at retirement that is usually either a percentage of salary or is calculated under a formula based on salary and years of service. The other kind of pension plan, called a defined contribution (“DC”) plan, is now the predominant type of plan.  A DC plan provides benefits based on the investment returns on contributions made by the employer (and often the employees) to individual participant accounts and thus does not guarantee the amount of the monthly pension benefit, which is often not as generous as in a DB plan.

DB plans, which are insured by a government agency, the Pension Benefit Guarantee Corporation (“PBGC”), are sponsored and funded by employers, who appoint trustees and other fiduciaries to make investment and plan management decisions. In contrast, DC plans are not insured by the PBGC and the amount participants receive at retirement is not guaranteed, but because DC plans employ individual investment accounts, the participants often have more control over the investment of those assets.

Before ERISA was passed, there was very little protection, if any, for participants in either type of plan. Not only could their pensions be easily mismanaged and then terminated, but there were also no funding requirements for employers who sponsored DB plans and no insurance program to guarantee promised payments.

The lack of protection for American workers became a national concern in 1963 when Studebaker shut down its plant in South Bend, Indiana, and terminated its pension plan. Because of the termination, more than 4,000 autoworkers who had just lost their jobs also lost all or part of their pension plan benefits. This highlighted the tenuous position many employees faced across the country. Despite promises of a set pension amount at retirement, any company could close or terminate their pension plans, leaving many more thousands of workers with the rug pulled out from under them and no remaining resources for retirement.

Congress responded, after more than a decade of study, by passing ERISA in 1974, a law designed to “protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries . . . [and provide] appropriate remedies, sanctions, and ready access to the Federal courts.” 

ERISA protects not only DB and DC pension plans but other types of employee benefit plans as well. As the history and name of the law suggest, a primary focus of the law was to protect employees who participated for many years in their company’s DB pension plan from the risk that they would receive little or nothing when they retired. Thus, there were a number of major reforms enacted as part of ERISA. For example, ERISA imparted strict fiduciary standards of conduct, minimum vesting and funding requirements, disclosure requirements, and a government-run insurance program for terminated DB plans (the PBGC). All of these are specifically designed to ensure that workers receive the benefits they are promised.

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