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Throughout the history of employee retirement plans, changing market conditions have prompted employers to periodically rethink their retirement benefit plans. The earliest pension programs in the United States were noncontributory, defined benefit (DB) plans funded exclusively by employers. Then the Great Depression and the enactment of Social Security swung benefits in a contributory direction for several decades. A shift back toward noncontributory plans started during World War II, but with the advent of 401(k) plans, beginning in 1981, once again the momentum turned toward greater employee cost sharing and the defined contribution (DC) model. Today, thinking has begun to shift again, back to the idea that employees need the guarantee of a DB plan-but that they should still play a contributory role in the accrual of their retirement assets. This article traces the logic of these changes and proposes an updated version of the old contributory DB plans as an antidote to the insecurity of DC plans.
Two devastating market collapses within one decade have damaged a great many pension plans. Employees participating in defined contribution (DC) plans have seen their retirement assets deteriorate. Defined benefit (DB) plans have come under funding pressure, forcing employers to think hard about whether they can afford to continue providing the benefit for their workers. Retirement plan sponsors need to control costs, and employees are hungry for some security. What kind of retirement plan can serve both interests?
One model that might fit the bill is an old one: the contributory DB plan, which adds the element of employee contributions to defined benefits. If the contributory DB concept sounds unfamiliar, it's probably because it grew to predominance and then fell out of favor long before most of today's employees entered the workforce.
Historically, dramatic changes in market conditions have prompted shifts in employee benefit plans. Some of the conditions that led to the adoption of contributory DB programs have returned in our time, and in order to understand why the model may be useful now, it's necessary to understand something about its past.
WHERE WE'VE BEEN
American Express established the first private pension plan in the United States in 1875, and during the next 55 years, a total of 397 private sector plans came into being. Among...