Many separate, and yet intertwined, events in the 1980s led to the new corporate retirement plan reality that created for the first time a top 10 with no corporate plans.
The 401(k) plan was born in the early 1980s and by 1984, there were just more than 17,000 such plans in the U.S., with total assets of $91.75 billion, according to the Employee Research Benefit Institute, Washington. By 1990, assets climbed to $385 billion and by 1996, $1.06 trillion.
This year, as of Sept. 30, P&I data show the 1,000 largest U.S. retirement plans have a total of $2.7 trillion in DC assets, of which $652 billion is in 401(k) plans.
Before the 401(k) plan, the profit-sharing plan was the defined contribution plan of choice and made up a small fraction of U.S. retirement plan assets. In 1982, for example, the 25 largest profit-sharing plans in P&I's universe had a total of $13.4 billion in assets, less than GM had in DB assets. Profit-sharing assets were soon dwarfed by those in 401(k) plans. In an interview for this article, Dallas Salisbury, president and CEO of EBRI, cited the guaranteed investment contract as one of the first drivers in the growth of 401(k) plans.
The GIC was particularly attractive in an era of high interest rates, “offering as much as 14% guaranteed for 15 years,” Mr. Salisbury said.
According to a survey by Hewitt Associates, by mid-1985, the average 401(k) participant had 38% of his or her assets in GICs. Equity mutual funds and employer stock were next, with 19% each (P&I, Oct. 19, 1998).
Mr. Salisbury also said the rise of the 401(k) plan had its roots in the Reagan administration's preference for individual accounts.
“Reagan administration proposals beginning in 1982 were set up to reduce tax preferences for plan sponsors and increase them for individual retirement accounts,” he said.
Among the laws the administration backed was the Federal Employees Retirement Act of 1986, which created a three-legged retirement system for federal employees to replace the traditional defined benefit Civil Service Retirement System: Social Security, a new defined benefit plan and a defined contribution plan called the Federal Retirement Thrift Savings Plan.
The Feb. 23, 1987, issue of P&I stated the TSP would “one day boast the largest pool of assets of any in the United States, possibly the world.” Today, the plan is by far the largest in the U.S., with $375 billion in assets as of Sept. 30, according to P&I data.
By establishing a combined defined benefit-defined contribution retirement plan structure for its own workforce, the federal government essentially endorsed that kind of structure for corporations, according to Mr. Salisbury.
Another piece of legislation that led to the rise of 401(k) plans was the Tax Reform Act of 1986, which overhauled vesting, integration and coverage rules for defined benefit plans. As a result, many newer, smaller employers eschewed traditional pension plans in favor of 401(k) plans.
That law precipitated an editorial in the Oct. 13, 1986, P&I titled “Defined benefit plans slowly dying.” It warned that companies that find themselves exposed to an alternative minimum tax provision in the law would avoid the problem by abandoning DB plans.
The dire warning was all too true.
Corporations already had been wary of defined benefit plans because of some of the requirements of the Employee Retirement Income Security Act of 1974. Now tax reform, as well as Financial Accounting Standard 87, which required pension liabilities be shown on the balance sheet, made corporations even more cautious.
Further budget acts in 1986 and 1987 — restricting the tax exemption of senior management's pension plans and adding other costs — increased corporations' desire to move from defined benefit plans.