This is a comment on my blog be our American correspondent “Benefit Jack”.
He is responding to an article first published in the Wall Street Journal explaining how United States pensions are becoming more popular.
But American pensions are not “deferred pay” in the sense we know and love them in the UK.
Benefit Jack points out that occupational pensions are paid for instead of salary and they’re not always VFM (as we understand it). He’s against their return and accuses them of not having the transparency of 401K DC workplace savings plans.
The bold text is from the Pension Plowman.
Contributions to DB pension plans in the states can be contributory or non-contributory. Once upon a time, many were contributory. Many changed to non-contributory after ERISA legislation in 1974 made administration of contributory plans a challenge. Many public employee plans (not subject to ERISA) are still contributory today.
Yes, the employer controls the investments, however, in most of today’s private sector defined benefit pension plans, the organization uses a cash balance formula. There:’
(1) Pension credits are determined each year, and
(2) Accumulated credits receive a fixed rate of interest credit, typically something less than 5% (at least over the past 25 years).
Pension credits are based on salary, and in most plans with cash balance formulas, the crediting rate increases with tenure. Eligibility must occur no later than the January 1st or July 1st after completing a year of service. In plans with a cash balance formula, vesting in the employer contribution and credited earnings occurs at 3 years (at least since the 2006 Pension Protection Act).
However, median tenure of American workers has been less than 5 years for the past 7 decades. So, most workers who participate do vest, however, they typically leave with an accrued benefit of less than $7,000 – which is often involuntarily distributed and rolled over to an Individual Retirement Account. Few DB pension plan participants who are accruing a benefit under a cash balance formula will receive their benefit in the form of a monthly check.
A private sector defined benefit pension plan (other than a church plan) must be insured by the Pension Benefit Guarantee Association, a quasi-government organization. One reason why many firms roll over a small benefit is the PBGC insurance premium, which was once $1 per participant per year and is now $111 per participant per year (even for the most well-funded plans). Keep in mind that the PBGC limits the insurance amount. Where an employer terminates a pension plan that is not fully funded, the insurance often results in a reduction in the accrued benefit.
Those union/management multiemployer plans that were bailed out by 2021 legislation (perhaps the were just starting to undergo the cuts in benefits due to chronic, consistent, intentional, all but fraudulent underfunding). How chronic was the underfunding? Well, it was President Jimmy Carter who signed into law the Multiemployer Pension Plan Amendments Act of 1980 to shore up funding!
Carter, 1980!
In the states:
(1) The number of active participants in private sector defined benefit pension plans in the US has declined from a high of 30,100,000 to 11,077,000 in 2023 – even less today!
(2) Most of today’s NEW DB plans are “combo” plans for small employers, combining a career average, cash balance formula with a DC 401k/401a plan, where the code and regulations allow for an aggressive application of non-discrimination rules such that the owner of the firm receives the vast majority of the retirement benefits.
See: https://saberpension.com/db-dc-combo-plans for an example of who truly benefits from these plans
(3) In terms of joint management plans, where the union and the management are trustees of a plan for union members, the only reason these might be gaining traction was the decision by the Biden Administration to bail out the failing plans – cost to taxpayers, most who don’t have a pension plan, $90+Billion (and the bailout did not solve the structural issues)
(4) With respect to IBM, as best as anyone can tell from a distance, the shift from a match in the 401k plan to resuming accruals in the defined benefit pension plan was a reduction in benefits to workers.
See: https://401kspecialistmag.com/db-pensions-continued-life-support-more-likely-than-a-full-recovery/
I love how all of the American retirement industry is agog about the “demand” for “guaranteed income”. As a corporate benefits weenie with 47+ years of experience, one worker confirmed for me what Americans wanted when it came to employee benefits – at that time health coverage. She said:
“I want the best health care coverage YOUR money will buy!”
With respect to guaranteed retirement income, she would probably say:
“I want YOU to provide guaranteed, inflation-indexed income in retirement that would allow me to maintain my pre-retirement standard of living”
… never realizing that employers don’t shoulder the full cost of benefits, workers do. The employer contribution towards the cost of benefits is wages that the employer didn’t pay, or other benefits that weren’t provided.
In the states, the only exception to that rule is the value of the tax preferences applied to certain benefit plans.
