By James A. Klein
The death of the employer-sponsored defined benefit pension system was confirmed recently in Washington. The exact cause was not disclosed; however, a coroner's investigation — expected to take several years — is under way. Burial will be private, but a memorial service is expected at which many experts, including several who allowed the system to die, will lament its passing.
The pension system's health declined for many years, shriveling from 58,000 to 29,000 plans in the 10 years immediately preceding its demise. Pension plans suffered from many ailments, including overregulation, changing work force trends and high health care costs that sapped their strength. All these conditions, while debilitating, ultimately were not fatal. Many attribute the cause of death to neglect, and possibly malpractice, by the legislative and executive branch physicians who oversaw the system's care.
In support of this view, it was noted that several years ago defined benefit pensions appeared to rally from their ills with the advent of "cash balance" and other hybrid defined benefit plans. But legislation and litigation challenged the viability of these promising arrangements. Despite repeated requests for treatment, administering first aid to these injured plans did not seem to be a priority when policy-makers engaged in pension "triage".
Toward the end, legislative and executive branch physicians became fixated on treating one serious, though not lethal condition: assumption of underfunded plans by the Pension Benefit Guaranty Corp. Caregivers engaged in a highly publicized treatment of the PBGC's deficit fever that spiked because of historically low interest rates and the agency's decision to invest its own assets in bonds rather than better-performing equities. Resorting to discredited techniques, they applied leeches to purge the patient of "bad blood" by imposing unpredictable and costly funding rules. This hastened the end for underfunded plans and drove healthy plans to terminate rather than undergo such dubious treatment.
That the pension system's death was largely avoidable makes its passing all the more tragic.
In its final days, one fascinating phenomenon was reported. Before actual termination, many plans were "frozen," whereby newly hired employees were not enrolled and, often, existing participants earned no additional benefits. These are the first known cases of rigor mortis prior to death.
The exact date and birthplace of defined benefit pensions is commonly believed to be the late 1800s Wild West, when companies employing horseback express riders wanted to financially support widows whose husbands died as a result of that hazardous duty. Over the years the system prospered, aided by bipartisan policy granting favorable tax treatment for pension contributions. Millions of workers enjoyed the dignity of a secure retirement thanks to an employer-funded pension — protection no longer available for future generations, even though people are living longer in retirement.
The pension system had its reckless period. By its own admission, it hit rock bottom in the 1960s, when Studebaker Automobile Co. went bust and, without safeguards, retirees lost pensions. Through a difficult 12-step program culminating with passage of the Employee Retirement Income Security Act of 1974, the pension system regained its health and self-confidence. Since then, pension sponsors frequently chafed at ERISA's forced sobriety but acknowledged the law's framework — if not always its application — made sense for both employers and retirees.
A new challenge arose in the late 1970s with the emergence of the defined benefit plan's younger cousin, the defined contribution plan, nick named "401(k)." Among outsiders, incessant gossip swirled that they were bitter rivals. But those who knew the cousins best — employer sponsors and participants in both plans — knew that they worked exceptionally well together.
Upon learning of its cousin's death, 401(k) said: "People often said D.B. was past its prime and we didn't get along. Truth was, I respected D.B. for its guarantee of secure income, and D.B. appreciated that I helped workers accumulate savings. We were a great employer-sponsored team. Now I guess I'll have to take care of folks all by myself."
In addition to 401(k), the pension system is survived by another cousin, the employer-sponsored health benefit system, which has also been in seriously declining health for several years.
Funeral arrangements for terminated underfunded pensions are being handled by PBGC Mortuary. Arrangements for well-funded plans (the vast bulk of the system) will be provided through insurance annuities paying all promised benefits.
Those wishing to pay respects may do so at the businesses that formerly sponsored the deceased. There, employees will be working for substantially more years than if pensions had not succumbed. Contributions in memory of defined benefit pensions may be made to Social Security, the sole surviving source of guaranteed retirement income. For now.
James A. Klein is president of the American Benefits Council, Washington, which represents employers that sponsor employee benefit plans.