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Fact Sheet: Pension and Savings Protections

Terms
  • A defined benefit (DB) plan pays a guaranteed pension based on a worker's wages and years of service. The employer makes contributions and bears the risk. The number of plans has declined over the past 20 years from 100,000 to 33,000. Private sector defined benefit plans are insured through the Pension Benefit Guaranty Corporation (PBGC), a federal government agency. Public sector plans do not have this insurance protection.
  • Defined Contribution (DC) plans, such as 401(k) plans, are retirement savings plans to which the employee makes contributions. The employer may but is not required to pay a matching contribution. The risk lies with the employee and ultimate benefits depend on how well investments perform. There is no insurance for these plans.These have been replacing DB plans; there are 700,000 such plans today.
  • Cash balance plans are a hybrid between DB and DC plans: The employer pays into the plan and guarantees the benefit but the worker's pension amount depends on how well the plan's invested funds do in the market. About one-third of Fortune 100 companies now have cash-balance type plans.

Coverage

  • Since employers are not required to provide pension or retirement savings plans, there are 25 million American workers who have no retirement plan, other than Social Security.
  • Less than 20 percent of workers have a defined benefit plan. Most low-income, part-time and temporary employees are not covered by any private pension plan.
  • Only about 30 percent of retirees receive any private pension income. Less than half of retired men, and about one-fourth of retired women get private pensions.

Threats to Retirement Income Security

Almost no private pension is indexed to inflation, so the purchasing power of pensions shrinks over time. The retirement security of millions of retired and working Americans has been jeopardized by: the decline in traditional DB plans and growth in DC retirement savings plans; corporate corruption and improper auditing and accounting practices; the steep decline in the stock market; and the downfall and bankruptcies of giant corporations. The results are:

  • Tens of millions of retirees and workers lost their 401(k) savings from the practices and collapse of corporations like Enron, WorldCom, Adelphia, and Tyco;
  • The PBGC is covering so many under- and unfunded plans, particularly from bankrupt steel and airline companies, it now has a deficit of $10 billion compared to a $9.7 billion surplus in 2000. The General Accounting Office (GAO) has placed PBGC on its "high risk" list of government programs that need urgent Congressional and agency action;
  • A number of large employers are reducing or suspending their match to 401(k) plans;
  • Additionally, state legislatures have used state pension funds of public employees as a means to balance state budgets.

Employer conversion to cash balance plans is often accompanied by sharp reductions in pension benefits, especially for long-service or older workers, and huge savings for employers.

  • In July 2003, a federal district court ruled (Cooper v. IBM, Southern District of Illinois) that IBM's conversion to a cash balance plan violated age discrimination laws because older workers accrued lesser pension benefits than younger workers.
  • In February 2004, the same court ruled that IBM owes 140,000 older employees back payments for their losses with the conversion.
  • A GAO report says that cash-balance conversions could cause the value of pensions of older workers to drop by up to 50 percent.
  • Legislation proposed by the U.S. Treasury Department in 2004 does not protect workers who have already seen their pensions cut in cash balance conversions.

Alliance Position
The Alliance supports:

  • Proposals to expand pension coverage to workers who do not have coverage in the workplace;
  • Federal legislation holding corporate officers accountable for their actions regarding retirement savings plans;
  • Independent investment advisers and auditors;
  • Representation of workers and retirees on the boards of trustees of defined benefit and defined contribution plans;
  • A national ombudsman within the Department of Labor to protect the rights of plan participants; and
  • Federal protections for public sector pension plans similar to those for private sector plans.

The Alliance opposes regulatory changes that would permit the substitution or conversion of defined benefit plans to any other plan including cash balance and defined contribution plans without adequate protections for older workers.