America's Shifting Pension Balance

Shifting the Balance: the Evolution of America’s Pension System
Joanne Kolebar
April 2005

ii
Table of Contents
I. Introduction
II. Defined Benefit Plan
a. Early History
b. Emergence of ERISA
c. Tax Policy and the Defined Benefit Plan
III. Lack of “Guarantee” in the PBGC
a. Overview
b. Factors Affecting the Current Status of the PBGC
1. Investment Market
2. Termination of Underfunded Plans
3. Decrease in Defined Benefit Plans
4. Moral Hazard
c. Early Warning of PBGC Trouble
d. Current Reform
IV. Alternative Vehicles for Retirement Funding
a. Defined Contribution Plans
b. Evaluating the Criticisms of Defined Contribution Plans
1. Investment Return
2. Distribution Options
3. Employee Participation
c. Hybrid Pension Plans
d. Shifting Away from the Traditional Defined Benefit Model
e. Social Security – The Next Generation Shift
V. Conclusion

1
I. Introduction
The concept of retirement is simple enough. Merriam Webster defines it as the
“withdrawal from one's position or occupation or from active working life”.1
Missing
from that definition is the presumption that in order to withdraw from an active work life,
one must first possess sufficient financial resources throughout the retirement period. To
this end, workers are encouraged to evaluate their long term financial planning using the
analogy of a three-legged stool. Under this concept, a retiree’s financial resources are to
be comprised of their employer provided retirement benefits, Social Security, and private
savings.2
Of these “legs”, both the employer component and Social Security are
relatively new creations, finding their footing in our society during the 20th
century.
Retirement benefits evolved from a series of factors including increased life span,
industrialization, tax advantages, competitive pressures for employers, and a need to
provide economic security to older individuals.3
American Express pioneered this effort,
becoming the first private employer to offer their employees a pension plan in 1875.4
In
1940, only 15 percent of private sector workers were covered by a pension plan.5
By
1970, that number had grown to 45 percent of all private sector workers and has
continued to remain around this point.6
One of the other factors owing to the growth and development of the private
pension plan were the favorable tax provisions granted to such arrangements, beginning
1
See Merriam-Webster Online Dictionary, available at http://www.m-w.com/cgi-
bin/dictionary?book=Dictionary&va=retirement (last visited Mar. 5, 2005).
2
See Everett T. Allen, Pension Planning: Pension, Profit-Sharing, and Other Deferred Compensation Plans
1 (McGraw-Hill Co. 8th Ed. 1997) [hereinafter Pension Planning].
3
See id. at 7, 10, 11, 12.
4
See Employee Benefit Research Institute (“EBRI”), History of Pension Plans, available at
http://www.ebri.org/facts/0398afact.htm (Mar. 1998).
5
See id.
6
See id.

2
first in 1921.7
Currently tax favored employment based retirement benefits represent the
largest tax expenditure in the federal budget, totaling more than $120.6 billion annually.8
Coinciding with the development of employer provided pensions emerged a social
insurance program known as Social Security. This program, as first introduced in 1935,
sought to provide a retired worker a monthly benefit upon the attainment of age 65.9
Today, there are almost 30 million retirees covered under the Social Security system,
representing $30.1 million in monthly benefits.10
As the number of American’s covered by retirement benefits has increased, so has
our reliance on the continuation of such systems. The amount paid in retiree benefits
exceeded $1 billion during 2003.11
Backing employer provided benefits is over $3.5
trillion in assets invested in privately trusteed qualified plans.12
Either awaiting or
currently receiving those assets are 99.5 million participants.13
Despite the programs created to aid employees in accumulating the needed
retirement savings, the road to retirement has seen its share of challenges. In the early
1960’s, employees working at Studebaker suffered devastating losses when their
7
See History of Pension Plans (Revenue Act of 1921 exempted interest income on trusts attributable to
stock bonus or profit sharing plans from current taxation).
8
See EBRI, Tax Expenditures and Employee Benefits: An Update From the FY 2005 Budget, available at
http://www.erbi.org/facts/0204fact.pdf (Feb. 2005) (Tax expenditures represent otherwise collectable
revenue that is relinquished due to preferred provisions. Tax-favored employment based retirement
benefits accounted for 16.6 percent of the total $112.940 billion in FY 2005 tax expenditures.).
9
See Social Security Administration, Brief History of Social Security, available at
http://www.ssa.gov/history/briefhistory3.html (last visited Mar. 5, 2005).
10
See Social Security Administration, Monthly Statistical Snapshot, available at
http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/index.html (Jan. 2004).
11
See EBRI, Finances of Employee Benefits, 1960-2003, available at
http://www.ebri.org/facts/0205fact.b.pdf at 1 (Jan. 2005) (Total benefit payouts include both Social
Security and employer-sponsored benefits.).
12
See EBRI, Assets in Qualified Retirement Plans, 1985-2002: Revised, available at
http://www.ebri.org/facts/0904fact.pdf at 2 (Sept. 2004).
13
See EBRI, Private Pension Plans, Participation, and Assets: Update, available at
http://www.ebri.org/facts/0103fact.htm (Jan. 2003).

3
promised retirement benefits literally evaporated overnight.14
Learning from this
experience, Congress passed a set of comprehensive laws and guarantees designed to
ensure future pension safety. Forty years later, workers are watching the promises of
future pensions disappear yet again.15
This time around, there is a governmental program
backing up some portion of these benefits, but that is little solace to those who watch
their promised benefits cut almost in half, leaving them little choice but to continue
working rather than enjoy retirement.16
Rather than being an exception, workers are being left to wonder whether the
promises of a pension or even Social Security will ever materialize. Yet the amount of
financial resources required to adequately fund an individual’s retirement is accumulated
throughout the working years. Sudden changes to those potential sources of retirement
income, especially during the later years of employment, can be devastating, leaving
workers little choice but to forgo retirement or accept a lower standard of living.
In theory, pensions are an essential element in retirement planning. History,
however, has proven their inherent and hidden dangers. Much as the “three-legged stool”
was to balance the necessary elements of retirement funding, there is a balance in
evaluating the perceived certainty of the traditional retirement system against the greater
security that may come by focusing the responsibility on the employee from the start.
This note will survey the evolution of retirement benefits and the trends resulting
from an increased shift of responsibility to the employee. Part II reviews the history
surrounding the creation of traditional defined benefit pension plans, including the
14
See Kim Clark, Pension Tension, U.S. News & World Report, at 42, Jan. 24, 2005.
15
See id.
16
See id. (Article references steelworker whose pension benefits were reduced from $2,520 to $1,420 per
month, due to the pension plan’s insolvency. As a result, he was forced to return to the workforce at age 56
at a substantially lower wage.).

4
increased presence of legislation resulting from labor and tax policy concerns. Part III
focuses on the present uncertainty surrounding the financial solvency of the Pension
Benefit Guarantee Corporation (“PBGC”), as well as factors contributing to its
reoccurring deficit problems and impact on future pension benefit security. Part IV
surveys the defined contribution and cash balance plans as alternatives to the traditional
defined benefit model, and evaluates whether current economic circumstances make the
traditional defined benefit plan a viable choice. Part IV also looks at the current and
future proposed state of the Social Security program, and its impact on the employee.
Part V offers its conclusion to this note.
II. Defined Benefit Plan
a. Early History
Many of the first pension plans created became the framework for what is known
today as the defined benefit plan. At its very basic core, a defined benefit plan provides
an employee with a quantifiable benefit based upon salary and/or service.17
These types
of plans tend to reward employees with long periods of service to the company, since the
benefits earned are often highest at the later stages of employment.18
In addition, the
normal form of distribution is an annuity, thereby providing some form of a guaranteed
economic benefit for the remainder of the retiree’s life.19
Since the end benefit is defined
based upon an established formula, the employee does not bear the risk of sudden shifts
in the investment market.20
17
See Pension Planning at 47.
18
See id. at 51.
19
See id. at 89.
20
See id. at 50.

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Initial federal regulation surrounding private pension plans consisted of allowable
tax deductions for plan contributions as well as tax-free accumulation of income from the
pension trust.21
In order to qualify the trust to receive this favorable tax treatment, the
employer was required to maintain minimum contribution requirements and participation
standards.22
Almost two decades later, concerns began to arise that such plans were
being used as tax avoidance schemes leading to changes making the trusts irrevocable
and introduced the concept that such benefits must not discriminate in favor of higher
compensated employees.23
While defined benefit plans offer the promise of future retirement security to an
employee, their early history also revealed a potential danger as promises failed to
materialize into actual benefits.24
The concern that employees would rely on an
employer’s promise to their ultimate detriment did not translate into legislative action
until 1958, when the first plan reporting requirements surfaced.25
This first step,
however, left the burden on the employee to monitor for fiduciary abuse.26
The Welfare
and Pension Plan Disclosure Act Amendments of 1962 proceeded a step further by
placing the onus on the Federal government.27
21
See U.S. Department of Labor, History of EBSA and ERISA, available at
http://www.dol.gov/ebsa/aboutebsa/history.html (last visited Feb. 2, 2005) (citing Revenue Acts of 1921
and 1926).
22
See id.
23
See Congressional Budget Office, History of Employee Based Retirement Systems, available at
http://www.cbo.gov/OnlineTaxGuide/Text_1A.cfm (last visited Mar. 6, 2005).
24
See Nancy I. Ross, Financing Retirement: It’s a Matter of Time; Pension Policy Commission Watching
Federal Planners; Retirement in America a Changing Scene, Washington Post, Nov. 12, 1978 at F1
[hereinafter “It’s a Matter of Time”].
25
See Congressional Budget Office, Tax Policy for Pensions and Other Retirement Saving, CBO Study, at
135 (Apr. 1987) [hereinafter “Tax Policy for Pensions and Other Retirement Saving”] (citing Welfare and
Pension Plan Disclosure Act of 1958).
26
See id. at 136.
27
See id.

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b. Emergence of ERISA
The lack of substantial regulation surrounding employer provided retirement
funding became more evident as long term employees learned that their pension benefit
would be just a percentage of expectations, or worse, would not exist at all.28
Prior to the
1974 passage of the Employee Retirement Income Security Act (“ERISA”), an estimated
1 million persons failed to receive their vested pension benefits.29
ERISA marked one of
the most sweeping set of legislative enactments designed to protect the employee’s right
to the pension benefits promised.30
A number of provisions were directly geared towards protecting the employee’s
participation rights within the plan and formalizing their rights to such benefits.31
Such
provisions included maximum periods of service that an employer could impose before
fully vesting an employee’s pension benefit, establishment of a maximum age and service
threshold for initial participation in the plan, and provisions requiring full vesting should
the plan be terminated.32
In order to properly communicate these benefits to the
employee, the act requires that a summary of the plan provisions be provided to
employees “in a manner calculated to be understood by the average plan participant or
beneficiary.”33
Additionally, plan financial information now became subject to review by
28
See Hearings before the Senate Subcommittee on Private Pension Plans of the Committee on Finance,
93d Cong., 1st Sess., 451 (1973) (Comments of Senator Vance Hartke: “If you remain in good health and
stay with the same company until you are sixty-five years old, and if the company is still in business, and if
your department has not been abolished, and if you haven't been laid off for too long a period, and if there's
enough money in the fund, and if that money has been prudently managed, you will get a pension.”).
29
See It’s a Matter of Time.
30
See 29 USCS § 1001(a) (In its finding of facts and declaration of power, Congress enacted ERISA in part
because “…the continued well-being and security of millions of employees and their dependents are
directly affected by these plans…”).
31
See Summary of the Major Provisions of Public Law 93-406 The Employee Retirement Income Security
Act of 1974: Hearings Before the Committee on Ways and Means, 94th Cong. 3-5 (1975) [hereinafter
“Summary of Major Provisions of ERISA”].
32
See id.
33
See id. at 2.

7
multiple parties due to the requirement that an annually audited financial statement be
prepared and submitted to the Secretary of Labor, as well as provided to the individual
plan participants.34
ERISA also addressed the growing trend of insolvent plans by requiring full
funding of normal costs or newly accrued costs attributable to the plan for the given
year.35
Costs attributable to employees’ prior credited service to the plan, as well as
experience gains or losses by the plan, must be funded within the established
amortization timetables.36
Expanding past provisions that sought to cure funding inadequacies, the act
established formal fiduciary duties to protect the management of the plan’s assets.37
This
included requirements that plan fiduciaries act “solely in the interests of the plan's
participants and beneficiaries” and for their exclusive benefit.38
Fiduciaries are also
required to invest plan assets with the same “care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and familiar
with such matters would use” and sufficiently diversify plan assets so as to minimize the
risk of large losses.39
Defined benefit plans are also prohibited from holding more than
10 percent of plan assets in employer securities or real property.40
Failure to abide by the
prescribed requirements would result in personal liability when such standards were
breached, and provided for the potential of excise taxes up to 100 percent of the
34
See id. at 1-3.
35
See id. at 7 (Experience gain or loss is “the difference between the anticipated experience of the plan and
the actual experience with regard to such matters as: earnings by the plan, employee turnover,
compensation, level of social security benefits and death rates.”).
36
See id.
37
See id. at 8-9.
38
See 29 USCS §1104.
39
See id.
40
See 29 USCS §1107.

8
prohibited transaction amount.41
These financial penalties were in addition to the various
criminal and civil penalties that may be levied depending upon the provisions violated.42
Finally, one of the most significant elements of ERISA was the establishment of
the Pension Benefit Guarantee Corporation (“PBGC”).43
Much as the name suggests, this
Corporation, housed under the Department of Labor, was established to act as termination
insurance for the benefit of plan participants in cases of underfunded plan terminations.44
ERISA requires that defined benefit plans participate in the PBGC.45
The PBGC was
designed to function as a self funded program, collecting premiums from all covered
plans.46
While the PBGC may have provided defined benefit plan participants with some
semblance of protection, the program was not designed to provide complete coverage
against a plan’s termination.47
The presence of the PBGC and its affect on defined
benefit plans will be explored in greater detail in Section III.48
c. Tax Policy and the Defined Benefit Plan
In order to receive tax preferred treatment, a defined benefit plan must be
qualified as established in part under §401(a) of the Internal Revenue Code (“Code”).49
Generally, deductions for plan contributions are limited to the amount required to satisfy
41
See 26 USCS §4975.
42
See 29 USCS §§ 1109, 1111, 1131.
43
See Summary of Major Provisions of ERISA at 15.
44
See 29 USCS § 1302 (The purposes of the PBGC are enumerated to include: “(1) to encourage the
continuation and maintenance of voluntary private pension plans for the benefit of their participants, (2) to
provide for the timely and uninterrupted payment of pension benefits to participants and beneficiaries under
plans to which this title applies, and (3) to maintain premiums established by the corporation under section
4006 [29 USCS § 1306] at the lowest level consistent with carrying out its obligations under this title.”).
45
See Summary of Major Provisions of ERISA at 15-16.
46
See 93rd Cong., Employee Retirement Income Security Act of 1974 S15740 (S. Conf. Rep. 1974).
47
See id. (Vested benefits would be covered to the “lesser of 100 percent of the employee's wages during
his highest-paid 5 years, or $750 monthly.” Furthermore, plan provisions granting an increase in benefits,
within five years of the plan’s termination, would only be recognized at 20 percent per year between the
time of the plan provisions’ implementation and plan termination.)
48
See infra Section III.
49
See 26 USCS § 401(a).

9
the minimum funding requirements for the plan year.50
If a plan is deemed “fully
funded”, no minimum funding contribution is required and therefore no deduction can be
taken by the employer.51
To further discourage overfunding a plan, the code also
imposes an excise tax of 10 percent on nondeductible contributions.52
A funding standard account is used to measure the level of contributions required
for a given year.53
An element in the computation of this account requires the plan
sponsor to calculate the cost of benefits, both those that have accrued during the current
year and supplemental costs owing to retroactive benefit increases or crediting of prior
service.54
Unfortunately, defined benefit plans do not lend themselves to a simple
determination of costs. Instead such costs are based upon “actuarial assumptions and
actuarial cost methods that are reasonable and that offer the actuary’s best estimate of
anticipated experience under the plan”.55
Assumptions in the plan’s charges calculation will include items such as interest
rate, mortality, and time of payment.56
The Code does provide some boundaries as to the
assumed interest rate in determining the plan’s current liabilities, however the permissible
50
See 26 USCS § 404(a)(1)(A)(ii).
51
See id.; 26 USCS § 412(c)(7).
52
See. 26 USCS §4972(a).
53
See U.S. Joint Committee on Taxation, Present Law and Background Relating to
Employer-Sponsored Defined Benefit Plans and the Financial Position of the Pension Benefit Guaranty
Corporation (“PBGC”), JCX-16-03 at 22 (Mar. 10, 2003) [hereinafter “Present Law and DB Plans”].
54
See id. at 23.
55
56
See Present Law and DB Plans at 22.

10
range still provides broad latitude.57
All items being equal, the interest rate assumption
can have the largest affect on the calculated value of plan liabilities.58
A plan may also be required to make deficit reduction contributions when their
assets are less than 90 percent of current liabilities.59
However such contributions may
not exceed the amount required to bring the plan’s current funding status to 100
percent.60
This does not provide a plan the opportunity to add additional funding when
the company may be best financially able to do so.
While there are no regulations forcing a company to create a private pension plan,
the Code does protect against the reduction of benefits already accrued.61
Therefore,
although a plan may reduce future costs by eliminating or reducing future benefits, those
benefit obligations created under the prior terms of the plan must be funded. Generally,
funds contributed to a pension trust may not revert to the sponsor unless the plan is
terminated and plan liabilities have been satisfied.62
The Code makes it more untenable
for plans to terminate for the sake of reclaiming excess plan assets by subjecting such
monies to treatment as gross income and the imposition of an excise tax of up to 50
percent.63
Congress has added to the complication in funding defined benefit plans,
struggling with the dichotomy that exists between establishing proper funding standards
57
See 26 U.S.C.S. § 412(c)(3)(A)(1) (Provides in part that the permissible range shall be “not more than 10
percent above, and not more than 10 percent below, the weighted average of the rates of interest on 30-year
Treasury securities during the 4-year period”. Furthermore the assumption must also be in line with the
rate that would be used by insurance companies to purchase annuities satisfying the liabilities of the plan.).
58
See U.S. Government Accountability Office, Hidden Liabilities Increase Claims Against Government
Insurance Program, GAO/HRD-93-7 at 20 (Dec. 1992) [hereinafter “Hidden Liabilities”].
59
See USCS § 412; Present Law and DB Plans at 26.
60
See id.
61
See 26 USCS §411(d)(6).
62
See Present Law and DB Plans at 19.
63
See 26 USCS § 4980; Rev. Rul. 2003-85, 2003-32 I.R.B. 291 (Excise tax begins at 20%, however the tax
increases to 50% when the company fails to establish a replacement plan or provide pro rata benefit
increases to accrued participant benefits within the terminating plan.).

11
and limiting tax deductions.64
Starting in the early 1980’s, Congress began adjusting
provisions of the Code directly affecting the funding of defined benefit plans. The Tax
Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) prohibited the deduction of
contributions in excess of the allowable maximum annual benefit and for future cost of
living adjustments.65
Five years later, Congress again targeted deductible contributions, however this
time it specifically limited the maximum contribution to 150 percent of the plan’s current
liabilities in spite of the fact that the plan may have accrued liabilities.66
At the time of
its enactment, industry experts questioned its prudence, citing concerns about a plan’s
ability to make “catch-up” contributions based on sudden shifts in the investment market
or accrued benefits.67
The legislative tide began to turn again in 1994, with the passage
of the General Agreement on Tariffs and Trade (“GATT”), when predictions of
problematic underfunding began to hold true.68
Instead of restricting funding, the new
legislation tightened interest and mortality assumptions, previously used by plans in
calculating accrued liabilities, thereby increasing liabilities and creating new funding
obligations.69
Other provisions of the current Code also seem to exemplify problems Congress
has found in trying to promote and protect defined benefit plans. For instance the Code
64
See Michael J. Collins, Reviving Defined Benefits Plans: Analysis and Suggestions for Reform, 20 Va.
Tax Rev. 599, 644 (2001) [hereinafter “Reviving Defined Benefit Plans”] (Arguing that the full funding
limitations were added based upon revenue raising considerations versus sound policy.).
65
See American Bar Assoc., Employee Benefits, 36 Tax Law 985 (Summer 1983); 26 USCS §415 (Limits
the annual benefit that may be provided under a qualified plan.).
66
See Jerry Geisel, Pension Contribution Limit Will Raise Employers’ Costs, Business Insurance, at 2, Jan.
25, 1988.
67
See id. (“Under the new law, such a company will be limited to smaller pension contributions now, but
these will increase in later years as the workforce matures. It will be more difficult to build up a significant
cushion in the plan that could protect employed against future financial difficulties.”).
68
See Kathy M. Kristof, U.S. Pension Plan Deficit Grows 34% To $71 Billion, Los Angeles Times, at D1,
Dec. 6, 1994.
69
See Jeffrey R. Houle, How GATT Changes American Pension Plans, Legal Times, at 20, Jan. 16, 1995.

12
provides for exceptions to minimum funding requirements that may be granted to plans
based on business hardship.70
The hardship may be granted where the application of the
funding standard would be “adverse to the interests of plan participants in the
aggregate”.71
In most cases, the continuation and future promise of accruing benefits will
be more advantageous to participants versus the alternative of plan termination due to a
plan’s failure to make required contributions. However such provisions may just serve to
delay the inevitable.
Congress further opened this door with the passage of the Pension Funding Equity
Act of 2004. In part, the legislation provided those within the steel and airline industries
the option of foregoing required deficit reduction contributions for two years, provided
they were not required to make deficit reduction contributions in 2000.72
Continental
Airlines recently availed itself of the new provisions, electing to forgo its $250 million
annual contribution.73
Had the contribution been made, the pension funding level would
have only maintained its pension funding level at 90 percent.74
While this presents
Continental and others like it a short-term fix, plans will now face larger contributions in
future years as the missed contributions add to the overall unfunded plan liabilities.75
III. Lack of “Guarantee” in the PBGC
a. Overview
As discussed in the previous section, the conception of the PBGC, as the final
safeguard against defunct private pension plans, was as an essential element of the
70
See 26 USCS §412(d); Rev. Proc. 2004-15, 2004-7 I.R.B. 490.
71
See 26 USCS §412(d)(1).
72
See Pension Funding Equity Act of 2004, H.R. 3108, 108 Cong. (2004) (enacted).
73
See Bill Hensel, Jr., Pension Funding on Hold; Continental Not Contributing to the Plan this Year,
Houston Chronicle, at Business 1, Sept. 4, 2004.
74
See id.
75
See DOL Pension Proposal Leaves Open Questions, Business Wire, Jan. 11, 2005.

13
ERISA legislation.76
Those that argue for the defined benefit plan’s growth and
continuation specifically point to the fact that the defined benefit plan has an advantage
over other forms as their benefits are guaranteed.77
This claim, however, is undermined by two essential factors. First, inherent in the
original design of the PBGC was that the guarantee only protects plan participants from
being totally devoid of a vested pension benefit, and therefore the insurance only covers
the benefit up to a maximum threshold.78
Second, also inherent in the PBGC’s initial
design, the continuation of the PBGC and its ability to assume benefit obligations rests in
its continued solvency.79
If the PBGC were to become insolvent, not only would the
payments of current retirees be in jeopardy, but those of active defined benefit
participants whose plans may someday require the PBGC’s intervention.
In the current environment, the PBGC is funded through insurance premiums paid
by covered defined benefit plans, investment income, and monies recovered from
terminated underfunded plans.80
Premiums for single employer pension plans are set at
an annual rate of $19 per participant.81
Plans deemed to be underfunded require an
additional per participant premium of $9 per $1,000 of unfunded vested benefits.82
While
the requirement of additional premiums for underfunded plans serves as some level of an
76
See supra Section II(b).
77
See Reviving Defined Benefit Plans at 607.
78
See supra note 33.
79
See U.S. Government Accountability Office, Pension Benefit Guaranty Corporation: Structural Problems
Limit Agency’s Ability to Protect Itself from Risk, GAO-05-360T at 2 (Mar. 2, 2005) [hereinafter “PBGC
Structural Problems”] (“PBGC was thus mandated to serve a social purpose and remain financially self-
sufficient.”).
80
See PBGC, Pension Insurance Premiums, available at
http://www.pbgc.gov/publications/factshts/PREMFACT.HTM (last visited Mar. 8, 2005).
81
See 29 USCS § 1306(a)(3)(A)(i).
82
See 29 USCS § 1306(a)(3)(E)(ii).

14
experience factor consistent with other types of insurance, this additional premium may
be waived if the contributions for the prior year equaled the full funding limit.83
A plan may become subject to the benefits of the PBGC upon a showing of severe
financial distress, including the company’s liquidation or reorganization in bankruptcy, or
upon a showing that the continuation of the pension plan will jeopardize the existence of
the business.84
Furthermore, the PBGC retains the power to involuntarily terminate
plans.85
Such terminations will normally result from a determination that the plan is
unable to make the required contributions, as established under the minimum funding
standard; pay retiree benefits currently due; or where the continuation of the plan has a
reasonable potential to create a long-run loss to the PBGC.86
The pension benefits that a participant will receive upon the PBGC’s takeover
will depend on several factors. First, any plan provision that creates an increase in
benefits within 60 months of the plan’s termination is not guaranteed under the PBGC.87
Second, the PBGC establishes a maximum threshold benefit.88
Therefore, should the
participant’s normal retirement benefit, based upon the plan’s provisions, exceed that of
the threshold benefit, the participant will be limited to that amount.89
For plans
terminating in 2005, this can range from a maximum monthly benefit of $3,801 for those
retiring at age 65 down to $1,710 for those retiring at age 55.90
83
See 29 USCS § 1306(a)(3)(E)(iv).
84
See 29 USCS § 1341(c).
85
See 29 USCS § 1342(a).
86
See id.
87
See 29 USCS § 1322(b)(1)(B).
88
See 29 USCS § 1322(b)(3).
89
See id.; Maximum Monthly Guarantee, PBGC, available at
http://www.pbgc.gov/services/descriptions/guarantee_table.htm (last visited Mar. 8, 2005).
90
See id.

15
In recent years, the funding status of the PBGC itself has begun to resemble that
of the pension plans it is required to assume. At the end of fiscal year 2001, the PBGC
reported a surplus of $7.73 billion.91
Within a year, that surplus was depleted, replaced
by a deficit of $3.64 billion.92
At the end of 2004, that deficit has soared to $23.3 billion,
of which almost $12.1 billion was incurred during 2004.93
Looking ahead, the PBGC has
signaled that the scope of the problem has not yet climaxed. As of September 30, 2004,
the PBGC estimates that the “reasonably possible exposure”, based on the financial status
of plans with unfunded vested benefits, is $96 billion.94
Should this scenario be realized,
the PBGC itself could be forced into bankruptcy.95
Analysis done by outside
organizations tends to support this possibility.96
A recent analysis completed by the
Center for Federal Financial Institutions (“COFFI”) has estimated that the PBGC’s
single-employer program could run out of cash by 2020.97
Such action creates yet another level of uncertainty for pension plan participants,
due to the fact that absent a “bail-out” by Congress, the PBGC would be required to cut
or terminate future benefits. Based upon some projections, the amount of funding needed
to preserve the PBGC solvency may reach $78 billion.98
While the principles underlying
91
See PBGC, Pension Benefit Guaranty Corporation 2001 Annual Report, available at
http://www.pbgc.gov/publications/annrpt/01annrpt.pdf at 29 (last visited Mar. 8, 2005) [hereinafter PBGC
2001 Annual Report].
92
http://www.pbgc.gov/publications/annrpt/02annrpt.pdf at 31 (last visited Mar. 8, 2005).
93
http://www.pbgc.gov/publications/annrpt/04annrpt.pdf at 1 (last visited Mar. 8, 2005).
94
See Can the PBGC be Restored at 3 (Plans included were based upon companies with below-investment
grade “junk bond” ratings.).
95
See id. at 12.
96
See id.
97
See id.; See Center on Federal Financial Institutions, PBGC: Updated Cash Flow Model from COFFI,
available at
http://www.coffi.org/pubs/PBGC%20Updated%20Cash%20Flow%20Model%20from%20COFFI.pdf
(Nov. 18, 2004).
98
See id.

16
ERISA would suggest that pension benefits should be protected, given the growing
federal deficit and additional funding required for Social Security, it is hard to presume
with absolute certainty that Congress would act to fully fill this type of liability.99
Because of its vulnerable status, the PBGC’s single-employer pension program
was placed on the U.S. Government Accountability Office’s (“GAO”) “high-risk” list of
federal programs requiring Congressional attention in July 2003.100
Looking at the
factors affecting the PBGC’s current problems, it is important to separate those that have
resulted from recent economic events and those underlying the very structure of the
PBGC and defined benefit plans.101
b. Factors Affecting the Current Status of the PBGC
1. Investment Market
One of the factors that can quickly affect the funding status of a pension trust is a
change in the performance of its underlying investments.102
It was estimated that in
2002, almost 60 percent of defined benefit plan assets were invested in stocks.103
This
was a contributing factor in the termination of the Bethlehem Steel pension plan, whose
plan assets declined by $2.6 billion in a period of just 27 months.104
The PBGC has also
suffered from a decline in its own investment income, incurring a $748 million loss in
99
See John D. McKinnon and Jackie Calmes, Trims in Domestic Spending, Growth in Defense Promise
Scant Change in Deficit, Wall Street Journal, Feb. 8, 2005, at A1 (Administration’s proposed budget for FY
2006 focuses on broad domestic cuts and is criticized for doing little to reduce FY 2005 deficit of $427
billion); Christopher Cooper and Shailagh Murray, Bush Begins to Woo Democrats to Back His Social
Security Plan, Wall Street Journal, Feb. 4, 2005, at A5 (Resistance in proposed Social Security
privatization due in part to estimated increase of $754 billion to deficit).
100
See U.S. Government Accountability Office, Airline Plans’ Underfunding Illustrates Broader Problems
with the Defined Benefit Pension System, GAO-05-108T at 2 (Oct. 7, 2004) [hereinafter “Airline Plans’
Underfunding”].
101
See id. at 5.
102
See Single Employer Pension Insurance at 24.
103
See id. (Citing 2002 U.S. Investment Management Study, Greenwich Associates, Greenwich, CT.).
104
See id. at 19 (The Bethlehem Steel plan had 73% of its assets invested in foreign and domestic stocks as
of Sep 30, 2000.).

17
2001 versus the $2.46 billion gain from the prior year.105
While one year of investment
losses may not be devastating to an adequately funded plan, when coupled with a series
of other factors, such plans may quickly display a turnabout in condition.106
In periods of investment decline, the funded status of the plan can be further
hampered if interest rates are reduced or held low.107
The GAO concluded in its 1992
study that lowering interest rates by only one percent would increase the number of
underfunded plans by 65 percent.108
This type of scenario has occurred with the 30-year
Treasury Security rates dropping almost two percent since January 2000.109
2. Underfunded Plan Terminations
The quick turnabout of the PBGC’s financial status has been greatly impacted by
recent terminations of large underfunded plans in the steel and airline industries.110
Included in this category were Bethlehem Steel, LTV Steel, National Steel, and the US
Airways Pilots’ Pension plan.111
During the period between 2001-2004, these four
terminated plans accounted for claims of $7.5 billion against the PBGC.112
So far in
2005, the airline industry has already added another $3.7 billion to the PBGC’s troubled
finances.113
While the steel and airline industries were impacted by the overall economic
105
See PBGC 2001 Annual Report at 1.
106
See U.S. Government Accountability Office, Single-Employer Pension Insurance Program Faces
Significant Long-Term Risks, GAO-04-90 at 28 (Oct. 2003) [hereinafter Single-Employer Pension
Insurance] (For the period between 1988 and 2002, on average, investment income exceeded that of the
program’s premium income.).
107
See Hidden Liabilities at 25.
108
See id.
109
See Weighted Average Interest Rate Table, IRS, available at
http://www.irs.gov/retirement/article/0,,id=96450,00.html (last visited Mar. 8, 2005) (As of Jan. 2001, 30
year Treasury Securities rate was 6.63% versus Jan. 2005 of 4.73%.).
110
See Congressional Research Service, Can the Pension Benefit Guaranty Corporation Be Restored to
Financial Health, RL32702 at 2 (Dec. 16, 2004) [hereinafter “Can the PBGC Be Restored”].
111
See id.
112
See id.
113
See Kate Bonamici, By the Numbers, Fortune, Jan. 24, 2005, at 24 (PBGC set to take over United
Airline’s Pilot Pension plan with estimated unfunded liabilities of $1.4 billion); Steven Lott, PBGC

18
downturn experienced after September 11th
, their presence has historically contributed to
a substantial amount of prior PBGC liabilities.114
3. Decrease in Defined Benefit Plans
Legislative enactments designed to protect the soundness of defined benefit plans
have also contributed to employers’ decisions to either discontinue their retirement plans
or convert them to other forms that are not subject to insurance requirements of the
PBGC.115
This factor alone would not impact the solvency of the PBGC, as the number
of participants covered has increased over the past twenty years.116
The participant base, however, provides some telling clues as to the potential risks
faced by the PBGC. First, the concentration of retired participants has nearly doubled
since 1980.117
This is telling as to the increasing and current liabilities faced by defined
benefit plans as retiree benefits become due. Second, almost half of the PBGC’s program
plan participants are comprised from the manufacturing sector.118
This lack of
diversification adds another level of risk to the PBGC’s continued solvency as negative
economic factors adversely impacting the sector could bring significant plan
terminations, similar to what is currently being experienced by the transportation
sector.119
Finally, the decline in pension plans coupled by the increase in plan
Becomes Trustee Of Three US Air Pensions, Aviation Daily, Feb. 4, 2005, at 4 [hereinafter “PBGC
Becomes Trustee of Three US Air Pensions”] (PBGC assumes liability for three remaining US Airways
pension plans totaling $2.3 billion.).
114
See Single-Employer Pension Insurance at 17 (“According to PBGC’s executive director, underfunded
steel company pension plans have accounted for 58 percent of PBGC single-employer losses since 1975.”);
Airline Plans’ Underfunding at 4 (Citing a number of PBGC takeovers in 1980s including Pan America,
Eastern, Braniff, and TWA.).
115
See Jim Jaffe, The Decline of Private-Sector Defined Benefit Promises and Annuity Payments: What
Will it Mean?, EBRI, July 2004 at 2; Reviving Defined Benefit Plans at 600.
116
See Single Employer Pension Insurance at 11.
117
See id. at 29.
118
See id.
119
See id. at 29-30; Airline Plans’ Underfunding at 4 (Estimated underfunding of airline pensions is $31
billion, however the transportation sector makes up only 8% of PBGC’s insured participants. Comparably,

19
participants equates to a greater concentration of participants within the remaining plans.
Thereby, the termination of one plan can bring with it significant liabilities to the
PBGC.120
4. Moral Hazard
While the PBGC is considered a type of plan termination insurance, its current
formation can create a moral hazard effect that is not encouraged under normal insurance
principles.121
In cases of financial pressures, a company may knowingly shift its
resources towards other goals rather than make the requisite contributions.122
Furthermore, as demonstrated by the actions of the legacy airlines, the presence of the
PBGC may be encouraging companies to seek the protection of Chapter 11 bankruptcy in
order to shed its unfunded liabilities.123
Taken a step further, this has the potential to
create a domino effect as others within the same industry strain to remain competitive.124
Presently, the PBGC has little ability to combat this moral hazard problem. In
cases where the PBGC may suspect such a problem is occurring, the only recourse may
be to involuntarily terminate the plan. Such a solution provides only a minimal benefit,
as the unfunded liability still becomes a claim to the PBGC and the active employee is
negatively impacted by being prevented from accruing future benefits.125
automotive related firms, a member of the manufacturing sector, are currently estimated to have $60 billion
in underfunding).
120
See PBGC Becomes Trustee of Three US Air Pensions (U.S. Airways three pension plan terminations
encompass $2.3 billion in liability and 51,000 participants.).
121
See John A. Appleman, Appleman on Insurance and Practice 1-3 §3.6 (Matthew Bender 2nd Ed. 2004).
(“In modern insurance law, moral hazard customarily connotes the inclination of any insured or beneficiary
to use less than reasonable care in preventing or avoiding a covered insurance loss than the care that would
be exercised if the loss was not insured.”).
122
See id. at 7.
123
See id.; PBGC Becomes Trustee of Three US Air Pensions (PBGC assumption of US Air pension
liabilities followed bankruptcy court ruling that the company could not emerge from bankruptcy unless the
plans were terminated.).
124
See PBGC Structural Problems at 10.
125
See Hidden Liabilities at 37.

20
Current bankruptcy law also adds to the moral hazard problem by insulating plan
sponsors against the PBGC’s liens once a petition for bankruptcy has been made.126
While the PBGC is allowed to assert claims against a plan sponsor for “plan asset
insufficiency” or unpaid funding contributions, unless the lien is perfected prior to
bankruptcy, it will be ineffective.127
This gap has been raised as an issue of concern for
years, however no legislation has been enacted to address this problem.128
c. Early Warnings of PBGC Trouble
While it may appear at first glance that the PBGC’s troubles are just a
continuation of the economic downturns that occurred following 2001, those closer to the
pension industry have tried to raise some of the inherent problems for decades. In the
early 1980’s, reports of a PBGC deficit coupled with large plan terminations and an
economic recession led to concerns about the continued solvency of the agency.129
Similar to recent years, debate regarding the problem yielded little results until the
agency faced dire problems that forced Congressional action.130
The Single-Employer Pension Plan Amendments Act of 1986 provided some
important changes, including a 326% increase in the basic per participant premium.131
This proved to be more of a stopgap measure as less than a year later, Congress again
126
See Daniel Keating, Chapter 11's New Ten-Ton Monster: The PBGC and Bankruptcy, 77 Minn. L. Rev.
838 (1993).
127
See id. at 814, 839-40.
128
See infra Section III (Reform surrounding lien perfection is still being sought in legislation
contemplated by the current Congress.)
129
See Nancy L Ross, Corporate Failures Burden Pension Insurance Agency, Washington Post, May 15,
1982 at D8; Leah R. Young, Pension Legislation Set to Go, Journal of Commerce, Aug. 20, 1987 at 1A
(Funding problems in the PBGC attributed to decline in the steel industry and large plan terminations.).
130
See Nicky Robertshaw, PBGC Awaits Revenue Decision, Pension and Investment Age, Jun. 1, 1987 at
12 (Report cites agency officials estimating the program’s insolvency by 2003 based upon its 1987 $4
billion deficit.)
131
See ABA, Annual Report: Important Developments During The Year, 40 Tax Law. 1001, Summer 1987
(Annual per participant premium increased from $2.60 to $8.50.).

21
moved to almost double the premium and establish the variable premium component for
underfunded plans.132
Concerns began to resurface again in 1990, with predictions that the PBGC’s
deficit would again swell pending the bankruptcy of larger corporations.133
In response,
pension plan sponsors saw their third increase in five years, as basic premium rates were
increased to their present level of $19 per participant. The breadth of the variable
premium component was also expanded, setting the maximum per participant premium to
$72 based upon the level of underfunding.134
Critics warned, however, that despite the
relative leveling off of the PBGC’s deficit to $1 billion, real reform was still needed.135
Such predictions seemed to quickly materialize as the PBGC was forced to
assume the obligations of more large plans including Eastern Airlines and Pan American
World Airlines.136
By mid 1992, the Secretary of Labor warned Congress that the
PBGC’s deficits could grow to $45 billion over 30 years if immediate action was not
taken.137
More than two years later, Congress finally passed the Retirement Protection
Act of 1994.138
The measures in this reform, including changes to mortality and interest
rate assumptions, accelerated contribution requirements for some underfunded plans, and
132
See John Boyd, Lawmakers Change Rules On Private Pensions, Journal of Commerce, Dec. 22, 1987 at
1A.
133
See Frank Swoboda, Pension Fund Called Vulnerable; Official Says Deficit Could Hit $ 8 Billion,
Washington Post, Jun. 14, 1990 at C1.
134
See Jerrry Geisel, Congress Tackles Familiar Benefit Issues, Business Insurance, Jan. 14, 1991 at 1.
135
See id.
136
See Jean Dimeo, Despite Losses, PBGC Crusading for Future Reforms, Pension World, May 1992 at 16.
137
See Elizabeth Lesly, Private Pension Funds in Peril as Federal Backing Runs in Red; Massive Bailout
May be Needed, Washington Times, Jul. 29, 1992, at A1.
138
See Patricia B. Limbacher, Gatt Reworks Pensions, Sweeping Reforms Tucked Away In Massive
Agreement, Pensions and Investments, Dec. 12, 1994 at 3.

22
the removal of a ceiling for the variable rate premium were expected to erase the PBGC’s
deficit within ten years.139
By 1997, the PBGC had seemingly made a full recovery, with credit mainly
placed on the 1994 reforms.140
Largely ignored, however, was the fact that the economy
had also rebounded aiding not only the PBGC’s investment returns but also the financial
stability of plan sponsors in general.141
In a 1998 report, the GAO warned that despite
the new $3.5 billion surplus, the PBGC still faced dangers from large underfunded
plans.142
When economic conditions deteriorated in 2001, it would appear again that
such predictions have held true.
d. Current Reform
As the history of the PBGC and legislative reform suggest, a rapidly rising deficit
for the organization tends to be the needed stimulus for action. The current
administration has come forward with its own set of proposals that encompass both the
funding and reporting requirements for defined benefit plans, as well as specific changes
to the PBGC.143
If the proposals are enacted, all plans covered under the PBGC will be impacted
by a sizeable increase in the basic flat-rate premium.144
Under the proposal, this premium
would increase to $30 per participant for 2006, and be updated annually to reflect
139
See Jerry Geisel, State Of PBGC Cause For Concern, Funding Changes Real News In Benefits
Community, Business Insurance, Dec. 26, 1994 at 33.
140
See Jerry Geisel, 1997 Employee Benefits: PBGC’s Finances, Reforms Cheer Employers, Business
Insurance, Dec. 22, 1997 at 26.
141
See id. (The bull stock market was listed as only a contributing factor in the PBGC’s recovery.); Stuart
Varney, Market Outlook for the New Year, CNN Business Day, Dec. 31, 1997 (Noting 20% rise in
performance of the Dow Jones Industrial Average for three consecutive years.).
142
See U.S. Government Accountability Office, Pension Benefit Guarantee Corporation: Financial
Condition Improving, but Long-Term Risks Remain, GAO/HEHS-99-5 at 2-3 (Oct. 1998).
143
See U.S. Department of Labor, Strengthen Funding for Single-Employer Pension Plans, at
http://www.dol.gov/ebsa/pdf/SEPproposal2.pdf (Feb. 7, 2005) at 2.
144
See id. at 31.

23
changes in the Social Security Administration’s Average Wage Index.145
The variable
rate premium would also be changed to a risk-based model, whereby the premium
charged per dollar of underfunding would be set by the PBGC Board, and based upon
expected claims and future financial condition of the PBGC.146
Plan sponsors facing bankruptcy would also be impacted by proposed provisions
that would freeze guaranteed benefits to the point before bankruptcy is declared.
Furthermore, assuming the plan did not terminate during the course of the proceedings,
this freeze would stay in place for a period of two years after the company emerges from
bankruptcy.147
This provision provides some benefit to the PBGC by protecting it from
accruing additional plan liabilities, but does little to benefit the participant other than
putting them on notice that additional benefits accrued under the plan are not guaranteed.
The administration’s proposal also seeks to close potential loopholes within the
bankruptcy code, by allowing the PBGC to perfect its liens for missed required pension
contributions after the sponsor has declared bankruptcy.148
It is unclear how quickly Congress will move on these proposals. Similar
measures were also considered during 2004, however the proposed legislation was either
struck from the bill’s final passage or not acted upon.149
IV. Alternative Vehicles for Retirement Funding
a. Defined Contribution Plans
145
See id.
146
See id. at 32.
147
See id.
148
See id. at 33.
149
See Can the PBGC be Restored at 13-16 (House version of the Appropriations bill for fiscal 2005 for
Labor-Health and Human Services-Education, H.R. 5006 included provisions that would have allowed the
PBGC to publicly release financial information received on plan underfunded by more than $50 million.
This provision was not included in the final version that became law. The National Employee Savings and
Trust Equity Guarantee Act of 2004, S. 2424, provided more specific changes to the PBGC and was passed
by the Senate Finance Committee in 2003 but not acted upon by the full Senate.).

24
Defined contribution plans began to emerge as a preferred retirement vehicle in
the early 1980’s.150
The forms of a qualified defined contribution plan can vary from an
employer sponsored profit sharing or money purchase plan, to an employee contributory
plan such as the 401(k).151
In essence, the defined contribution plan differentiates itself
by establishing individual participant accounts that are credited with contributions and
the results of the individual account’s investment earnings.152
Under most circumstances,
the investment direction of the account will be under the individual participant’s control,
who would be allowed to control both the investment allocation of contributions made to
the account and transfer between available investment options.153
Defined contribution
plans also differ by allowing the participant to take their account balance as a lump sum
distribution upon a distributable event such as termination, retirement, employee’s death
or disability.154
Employees may benefit by allowing such distributions to remain tax
deferred by rolling over the proceeds to a qualified IRA or future employer’s qualified
plan.155
The emergence and primary purpose of defined contribution plans has also
undergone its own evolution. One of the driving factors in the sudden growth of these
plans was the introduction of employee tax-deferred salary reduction agreements through
the 1978 Revenue Act.156
These plans, more commonly known as 401(k) plans, were
initially considered a vehicle that would enable employees to shore up the personal
150
See U.S. Government Accountability Office, Most Employers that Offer Pensions use Defined
Contribution Plans, GAO/GGD-97-1 at 4 (Oct. 1998) [hereinafter “Most Employers Offer Defined
Contribution Plans”] (In 1984, the percentage of employers offering only a DC pension plan was 68
percent.).
151
152
See id.
153
See id. at 399.
154
See id. at 48-49.
155
See id. at 96; 26 USCS §402(c)(1).
156
See Tax Policy for Pensions and Other Retirement Savings at 19.

25
savings portion of the “three-legged” stool.157
Under such plans, the employer may also
elect to match a portion of the employee’s contribution and make further discretionary
contributions, often based upon the profitability of the business.158
Plan sponsors that
choose to include an employer contribution feature may deduct such contributions,
generally up to 25 percent of the employee’s compensation.159
Many plan sponsors began to view this type of plan as a substitute for the
traditional defined benefit model.160
Factors for this migration included increased costs
and complexities in administering defined benefit plans as well as an increasingly mobile
workforce that makes portable pension benefits desirable.161
Qualified defined contribution plans are still subject to same Code and ERISA
requirements as their defined benefit counterparts, controlling such areas as minimum
coverage, vesting, reporting, and fiduciary duties.162
One important distinction under the
requirements established by ERISA is that defined contribution plans are not covered by
the PBGC.163
While at first, this may seem a detriment to plan participants, the lack of
plan termination insurance is a result of full funding requirements for defined
contribution plans.164
Therefore, in issues of plan funding, the risk to the employee is
limited to cases in which the plan has failed to make the requisite employer contribution
157
See EBRI, Employee Benefits: Trends, Equity, and Federal Revenue Implications, available at
http://www.ebri.org/ibpdfs/0484ib.pdf, at 13 (Apr. 1984) (Originally 401(k) plans seen as a supplement to
employer contributions made to pension plans.).
158
159
See 26 USCS §404(a)(3).
160
See Tax Policy for Pensions and Other Retirement Savings at 22; Deborah Rankin, Personal Finance:
The Fading of the Fixed Pension Plan, New York Times, at §3 pg 15 (Mar. 20, 1983).
161
See Most Employers Offer Defined Contribution Plans at 3.
162
See David L. Bacon, Employee Benefits Guide §2.05 (Matthew Bender 2004) [hereinafter “Employee
Benefits Guide”].
163
See USCS § 1321(b)(1); USCS § 1002(34).
164
See 26 USCS § 412(a).

26
for the given plan year, or outright misappropriation of assets by the plan’s trustee.165
In
either case, due to the individual account nature of such plans, the participant stands in a
position to be immediately alerted to such occurrences.166
Furthermore, ERISA also
dictates the bonding of plan officials who have access to its funds, mitigating instances of
fraud or embezzlement.167
b. Evaluating the Criticism of Defined Contribution Plans
Some within the retirement industry have criticized the shift towards defined
contribution plans due to the increased onus on the employee.168
Centered within this
view is the uncertainty brought with employee investment direction and account
distribution. Indeed, the criticisms raised are not purely academic and have been
documented by accounts of participants entering into retirement with inadequate
savings.169
However there are numerous options and proposals being proffered to make
defined contribution plans a viable alternative to the traditional defined benefit plan,
which will be discussed in the following sections.
165
See 26 USCS § 412(d); Rev. Rul. 78-223, 1978-1 C.B. 125 (Provides for waivers of required employer
contributions, and subsequent contributions that must be made in order to restore participants “to the
position in which they would have been had the waived amount been contributed.”).
166
See U.S. Department of Labor, Warning Signs that Pension Contributions are Being Misused, available
at http://www.dol.gov/ebsa/Publications/10warningsigns.html (last visited Mar 8, 2005) (Provides common
warning signs that participants may use as guidelines to inappropriate plan activity, such as irregular timing
of individual account statements, missed contributions from statements, significant drops in account
balances, etc.).
167
See 29 USCS § 1112.
168
See Daniel Halperin, Employer-Based Retirement Income - The Ideal, the Possible, and the Reality, 11
Elder L.J. 37, 61 (2003) [hereinafter Employer Based Retirement Income] (“In the case of defined-
contribution plans, which are becoming increasingly predominant, the employer merely promises to make
contributions, and the investment risk is on the employee.”).
169
See Institute of Management and Administration, Fidelity's Study Defines New Directions for Vendors
and Sponsors, DC Plan Investing, Nov. 9, 2004, at 1 (“Too many workers on the lower end of the earnings
scale are going to enter retirement with inadequate savings. The 401(k) industry has still not found a way to
help those workers in the most dire need of building up retirement savings.”).

27
1. Investment Return
As noted earlier, investment declines in pension trust assets have contributed to
the underfunded status of many defined benefit plans.170
In this instance, the plan
sponsor is left to make up any shortfalls to the pension trust based upon downturns of the
market. Under defined contribution plans, however, the employee alone is left to reap the
risks and rewards associated with market changes.171
Fiduciary duties created under
ERISA, including those requiring the plan sponsor to use prudence when making
decisions regarding plan assets, still carries through to defined contribution plans, but is
somewhat mitigated due to the participant direction element.172
However the plan
fiduciary is still required to prudently select the investment providers and options, and do
so in a manner that grants participants with at least three different investment options that
provide the ability for diversification.173
Additionally, plan sponsors are required to give
participants enough information regarding the investments to make informed decisions
and allow participants the opportunity to make investment changes at least once per
quarter.174
While ERISA requires that participants be given adequate information to make
informed investment decisions, there is additional risk shifted back to the plan sponsor if
170
See supra at Section III (b)(1).
171
See Craig Copeland, Employment-Based Retirement Participation: Geographic Differences and Trends,
available at http://www.ebri.org/ibpdfs/1004ib.pdf, Nov. 2004, at 5 (“The overwhelming majority of
individuals receiving DC plan benefits assume all of investment risk in their own accounts.”).
172
See 29 USCS § 1104(a)(1)(C) (Requires a fiduciary to diversify plan investments so to minimize risk of
large losses.); 29 USCS § 1104(c)(1)(b) (“No person who is otherwise a fiduciary shall be liable under this
part for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise
of control.”).
173
See 29 CFR 2550.404c-1.
174
See id.

28
that information takes the form of investment advice.175
Consequently, plan sponsors are
reluctant to provide investment advisors or specialized investment advice because of the
resulting fiduciary responsibility.176
Therefore, in today’s current environment, the
participant is often left to sift through generalized financial and investment education
materials and hope they are making the right choices.177
Another differentiation between investment related fiduciary responsibilities
designated to defined contribution and benefit plans is the unfettered ability for
participants to direct plan monies into company stock.178
Approximately 71 percent of
publicly traded companies offer their own stock as an investment choice in their defined
contribution plans.179
While participants may embrace such a choice, it can lead to
detrimental results, as evidenced during recent corporate scandals that ultimately
devastated some employee accounts.180
175
See 29 CFR 2510.3-21 (“…Such person renders advice to the plan as to the value of securities or other
property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities
or other property…”); 29 CFR 2509.96-1 (“…the designation of a person(s) to provide investment
educational services or investment advice to plan participants and beneficiaries is an exercise of
discretionary authority or control with respect to management of the plan…”).
176
See Rick Miller, Firms Dish Out 401(k) Advice, Crain's Chicago Business, at 42 (Study by Celent
Communications, LLC. found that only 14% of plans offered a managed portfolio option to participants.
Study cites continued concern by plan sponsors that do not want to expose themselves to fiduciary liability
by offering such services.).
177
See 29 CFR 2509.96-1 (Department of Labor has identified categories of information that may be
provided to participants that will not rise to the level of “investment advice”, which includes: information
regarding the plan; general financial and investment information (i.e. introducing concepts such as
diversification, dollar cost averaging, etc.); asset allocation models (demonstrating asset allocations of
hypothetical individuals based on time horizon and risk tolerance); interactive investment materials
(“materials which provide a participant or beneficiary the means to estimate future retirement income needs
and assess the impact of different asset allocations on retirement income”)).
178
See 29 USCS §1108(e) (Restrictions, otherwise created under 29 USCS §§ 1106 and 1107, on plan
investments in qualified employer securities do not apply to eligible individual account plans.).
179
See Jill Elswick, Caution Advised on Company Stock in Plans, Employee Benefit News, available at
http://www.benefitnews.com/retire/detail.cfm?id=6770&arch=1, Dec. 2004.
180
See Pamela Yip, 401(k) Risks Exposed; Enron Employees' Losses Highlight Dangers, May Spur Call
For Regulations, Dallas Morning News, Dec. 8, 2001 at 1A. (Total decline in Enron participant’s 401(k)
plan balances estimated at $1 billion.)

29
Recently the NASD has issued an advisory warning workers against investing too
much of their plan assets in company stock.181
The warning followed a study conducted
by EBRI, who concluded that as many as 25 percent of employees over 60 had at least
half of their 401(k) accounts invested in company stock.182
The use of company stock as
an allowable investment in defined contribution plans continues to be met with its share
of criticisms, and more so when employers force allocations to company stock or restrict
an employee’s ability to transfer out of the stock and into other available investments
within the plan.183
Participants adversely affected by company stock scandals have found some
recourse in lawsuits directed at company executives and plan trustees.184
Thus far, this
has netted some limited relief. In the case of WorldCom, participants were able to obtain
a $47.15 million settlement from several of the company’s executives that the class action
suit targeted.185
However the participants were not able to pursue their claim against an
outside company that served as trustee, because the duties of the outsourced trustee were
directed by WorldCom and there was no proof that they had obtained non-public
information indicating the true condition of the company’s stock.186
181
See NASD, Putting Too Much Stock in Your Company – a 401(k) Problem, available at
http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_013381&ssSource
NodeId=1177 (Feb. 15, 2005).
182
See id. (citing Sarah Holden and Jack VanDerhei, 401(k) Plan Asset Allocation, Account Balances, and
Loan Activity in 2003, EBRI, available at http://www.ebri.org/ibpdfs/0804ib.pdf (August 2004)).
183
See Richard L. Kaplan, Enron, Pension Policy, and Social Security Privatization, 46 Ariz. L. Rev. 53,
71-77 (2004) [hereinafter “Enron, Pension Policy, and Social Security Privatization”].
184
See In re Worldcom, Inc. Secs. Litig., 2005 U.S. Dist. LEXIS 1805 (S.D.N.Y. 2005) (Class action
lawsuit filed against a number of the former company’s directors and Merrill Lynch, a trustee for the
employee’s plan.).
185
See Joanne Wojcik, Merrill Lynch Dismissed from WorldCom Suit, Business Insurance, at 31, Feb. 7,
2005.
186
See Merrill Lynch Wins Workers' Lawsuit Over WorldCom 401(k) Plan Choices, New York Law
Journal, at 27, Feb. 7, 2005.

30
Allocations to company stock are only one facet of the concerns surrounding an
employee’s ability to successfully create a rate of return necessary to properly fund their
defined contribution plan.187
For instance in 1999, a study by EBRI concluded that two-
thirds of employee account balances were invested in equity funds.188
This tends to
support other research that suggests that participants do not understand the risks of failing
to diversify their accounts and heighten the damage by becoming reactive to turns in the
market.189
What is still unclear is whether participants in plans that provide investment
education, and still fail to make diversified investment strategies, are doing so because
they are unable to grasp investment basics or merely ignoring the materials.190
Legislative proposals are currently being considered to combat these issues, with
the reintroduced National Employee Savings and Trust Equity Guarantee Act
(“NESTEG”) bill leading the charge.191
To protect employees from issues concerning
investment in company stock, the bill would require companies to allow participants, who
have completed three years of service, to divest from company stock. The company
would also be required to provide the same disclosures, currently required under
securities law, to be distributed to plan participants. The current legislation attempts to
address concerns regarding proper investment direction and diversification by requiring
187
See EBRI, Worker Investment Decisions: An Analysis of Large 401(k) Plan Data, available at
http://www.ebri.org/ibpdfs/0896ib.pdf, at 3 (Aug. 1996).
188
See EBRI, 401(k) Asset Allocation, Account Balances, and Loan Activity, available at
http://www.ebri.org/ibpdfs/0199ib.pdf, at 3 (Jan. 1999) (Study revealed that 44% of total participant
account balances were invested in equity funds and another 19.1% in employer stock. Employer stock is
another form of an equity fund.).
189
See Arleen Jacobius, They Don't Get it: 401(k) Education Fails as Participants Time Market; Employees
Buy Equities After the Market Rises, then Sell when the Market Goes Down, Pension and Investments, at
3, Mar. 3, 2003 (Studies report that “more than half of plans have asset allocations that deviated
significantly from an optimal equity investment level”.).
190
See Humberto Cruz, Retirement’s Biggest Enemy is in the Mirror, Sun-Sentinel, at D3, Feb. 23, 2005
(Many see investing as a “chore”, and participant procrastination may contribute to poor investment
planning.)
191
See Grassley, Baucus Re-Introduce NESTEG Pension Bill, Announce Plans to Look at More Reforms,
Capitol Hill Press Releases, Jan. 31, 2005.

31
plans that allow for employee direction to require quarterly statements and notify plan
participants, who are invested in over 20 percent of a single investment, that they may be
inadequately diversified. Additionally, the plan would be required to provide annual
investment guidelines and retirement planning information, as well allow plan sponsors
the option of providing participants independent investment advisors without risking a
breach of fiduciary rules.192
Another option currently available to plan sponsors, that may aid participants in
obtaining proper asset allocation without incurring additional fiduciary liability, is the
addition of lifestyle funds within the plan’s investment lineup.193
These funds are
packaged allowing participants to choose a single fund based on risk tolerance that would
be diversified amongst the underlying investments within the fund.194
Furthermore, these
types of funds automatically rebalance at set intervals, so as to ensure the participant is
maintaining the selected diversified allocations.195
2. Distribution Options
Since the normal form of benefit for a defined contribution plan is a lump sum
distribution, the employee is left to invest it in a manner that will provide sufficient
income during their retirement years.196
Once again, critics point to this as a major
impediment against defined contribution plans because the retiree is no longer guaranteed
the safety of an annuity for the remainder of their lifetime.197
Similar to the problems
192
See id.
193
See Steve Tucky, The Rise of Lifecycle Funds Targeting Employees Risk Tolerance and Age, National
Underwriter, at 12, Jan. 12, 2005.
194
See id.
195
See id.
196
See U.S. Government Accountability Office, Participants Need Information on Risks They Face in
Managing Pension Assets at and During Retirement, GAO-03-810, at 9 (Jul. 2003) [hereinafter
“Participants Need Information on Risks”].
197
See Enron, Pension Policy, and Social Security Privatization at 85-86.

32
with participant investment education noted in the prior section, it is argued that
participants are not properly situated to invest retirement assets and run the risk of
outliving their retirement savings.198
Furthermore, critics argue that even if participants
choose to purchase an annuity with the proceeds of their distribution, they will not have
the same purchase power in the market.199
Another potential problematic area for participants is that they are normally able
to access this distribution at a point of termination, which will not necessarily correspond
with the time of actual retirement.200
This can result in a participant being given access
to funds that may be used for other purposes, therefore depleting needed funds for future
retirement. A recent study by EBRI tends to indicate that a majority of participants find
other uses for their lump sum distribution, rather than reinvesting in tax-qualified
financial savings.201
There are encouraging signs, however, as the same study shows
positive trends in the increasing number of participants rolling over their account balance,
with especially high concentrations for those nearing retirement or possessing significant
account balances.202
As the data suggests there is a valid concern when participants are given free
access to their retirement funds, however counter to this concern is the growing economic
reality that participants need or are forced to change employers within the course of their
198
See Participants Need Information on Risks at 10.
199
See Enron, Pension Policy, and Social Security Privatization at 86 (Defined benefit plans avoid sales
charges and other transactional inefficiencies encountered by defined contribution participants who shop
through the retail market.).
200
See Employer Based Retirement Income at 59-60 (Current rules provide for a “substantial dissipation of
accumulated benefits before retirement is reached.”).
201
See EBRI, Lump Sum Distributions an Update, available at http://www.ebri.org/notepdfs/0702notes.pdf,
at 3 (Jul. 2002) (35% reported using their entire rollover for investment in tax-qualified savings compared
to 41% who applied their distribution to paying down debts, mortgage, start of business, education, or
consumption.).
202
See id. at 4-6.

33
career, therefore creating a need for retirement portability.203
Additionally, the growing
popularity of lump sum distributions in traditional defined benefit plans suggests that
participants have grown to want a sense of control over their retirement savings.204
As a
means of curbing potentially detrimental behavior, current tax policy attempts to
encourage participants to retain their qualified retirement funds in similar vehicles by
imposing a 10 percent penalty on distributions received prior to age 59 ½, that are not
directly rolled over.205
3. Employee Participation
Creating sufficient retirement assets within a defined contribution environment
often requires an active decision by the employee to begin contributing to the plan.206
Critics of defined contribution plans again point out that the responsibility is shifted into
the hands of the employee, by requiring them to proactively make the decision to
contribute and select the appropriate contribution percentage.207
Much as employees
struggle with investment decisions, research also shows that employees do not understand
how much they need to contribute for retirement, or do not realize the pressing necessity
to begin participating at as early a point as possible.208
203
See Robert D. Hershey, Jr., Clinton Announces Steps For More Portable Pensions, New York Times at
D2, Sept. 18, 1996 (Estimated that 5 million persons with pensions change employers each year.)
204
See Participants Need Information on Risks at 13 (40% of defined benefit plans now offer participants a
lump sum offer. “…plan sponsors offer lump sums in response to employee demand for this option…”).
205
See 26 USCS § 72(t).
206
See Karen E. Smith, Richard W. Johnson, and Leslie A. Muller, Deferring Income in Employer-
Sponsored Retirement Plans: the Dynamics of Participant Contributions, National Tax Journal, at 639, Sep.
1, 2004 [hereinafter “Deferring Income in Employer-Sponsored Retirement Plans” (Study finds that
approximately 25% of employees opt out of participation and only 8% are contributing up to the maximum
amount.).
207
See Enron, Pension Policy, and Social Security Privatization at 65-66.
208
See EBRI, Will American’s Ever Become Savers?, available at http://www.ebri.org/ibpdfs/0404ib.pdf,
at 1 (Apr. 2004) (Survey finds that only 4 in 10 have done calculations with regard to the amount needed to
save for retirement. Of those, 1/3rd
do not know the results of the calculation.).

34
Resolving difficulties with employee participation can be aided through education
and enrollment strategies.209
Plan sponsors can also take part of the responsibility back
through plan design decisions. Increasingly, plans have begun adopting a negative or
passive enrollment feature that automatically enrolls employees that fail to “decline”
participation in the plan upon becoming eligible.210
Employer match provisions have
also proven to be a method for encouraging initial participation as well as specific
contribution levels.211
By increasing the percentage of the employee’s contribution that
the employer will match, the employee is encouraged to at least contribute at a level that
will allow them to maximize the employer monies available.212
Criticisms centered on employee participation also tend to ignore other available
forms of defined contribution plans. Money purchase and profit sharing plans are forms
of defined contribution plans, however the primary contributions to the plan are made by
the employer irrespective of any employee contributions.213
However the form and
features of a plan are at the discretion of the employer, including the decision to offer any
form of pension plan. Moreover, the form of benefits offered by an employer is often
driven by the market economy rather than social policy.214
c. Hybrid Pension Plans
209
See id. at 14 (43% of those completing a retirement savings needs calculation report making changes in
their retirement planning, including 57% of those that began to save more for retirement.).
210
See I.R.S. Announcement 2000-60, 2000-2 C.B. 149.
211
See Deferring Income in Employer-Sponsored Retirement Plans.
212
See id. (While studies suggest that a match can increase participants’ contribution rates, they also
suggest that it may suppress an employee’s decision to contribute beyond the match rate.).
213
See Pension Planning at 128 (Money purchase plans establish a fixed contribution amount for the
employee per year); and 141-142 (Profit sharing plans contribute to employees an amount based upon
profits.).
214
See Martin Booe, For a Better 401(k) plan, Just Add Some Inertia and a Dose of Procrastination,
Workforce Management, at 88, Oct. 1, 2004 (“Retirement plans are part of the marketing of a position, and
attracting high-quality people and retaining them. The match is going to cost less than the turnover cost.”).

35
Also contributing to the shift away from the traditional pension plan, is the
tendency of employers to create or modify existing plans into a hybrid model. Much as
the name suggests, a hybrid pension plan combines features of both the defined
contribution and benefit plan types.215
One of the more common forms to have emerged
is the cash balance pension plan.216
Under this scenario, participants are credited with a base contribution, usually
based upon current salary, age, and service, and an interest credit.217
The result creates
an account balance that would be paid to the participant upon termination, retirement,
death or disability.218
Plans using the cash balance model have cited the account balance
as an advantage to participants, giving them a more tangible idea of their accrued
retirement benefits.219
The majority of cash balance plans have emerged from companies with a
preexisting traditional defined benefit model.220
To facilitate the conversion, an opening
balance is calculated based on the present value of the participant’s current accrued
benefit under the prior plan.221
Cash balance plans are required to provide an annuity
option, however most plans also provide for lump sum distributions.222
As discussed
215
216
See Regina T. Jefferson, Striking a Balance in the Cash Balance Plan Debate, 49 Buff. L. Rev. 513, 519
(2001) [hereinafter “Striking a Balance”].
217
218
See id. at 335.
219
See U.S. Government Accountability Office, Cash Balance Plans: Implications for Retirement Income,
GAO/HEHS-00-207 at 19 (Sept. 2000) [herein after “Cash Balance Plans: Implications for Retirement
Income”].
220
See id. at 5 (Of the plans surveyed that have a cash balance plan, 90% previously covered employees
under a traditional defined benefit plan.).
221
See Striking a Balance at 546.
222
See id. at 335.

36
earlier, the lump sum option may be beneficial to employees provided the employee has
an adequate understanding of their retirement needs and investment options.223
While cash balance plans have the feel of a defined contribution plan, by
providing participants with an account balance, the plan remains classified as defined
benefit because the individual account is hypothetical and the actual funding for the plan
is pooled within the trust.224
Consequently, cash balance plans are also subject to PBGC
premiums, and therefore the same risks apply in terms of the plan and PBGC’s future
solvency.225
Treating cash balance plans as a defined benefit type also subjects the plans
to the same rules relating to plan deductions, as well as funding rules and other
requirements imposed under the Code or ERISA.226
The foray into the next generation of defined benefit plans has not occurred
without its own set of challenges. Benefit professionals, as well as the employees
impacted, have specifically criticized the plans as cost saving measures for companies at
the expense of older employees.227
This is mainly due to the different rate that benefits
accrue between the plan designs. While traditional pension plans tend to accrue the
largest benefits during the participant’s final years of service, cash balance plans accrue
the benefits more evenly during the course of employment.228
Therefore longer service
employees who have not yet neared retirement will tend to be adversely affected since
their traditional benefit plan does not yet reflect the full benefits they would have earned,
223
See supra at IV(b)(2).
224
See id. at 332, 334; Treas. Reg. § 1.401(a)(4)-8(c)(3) (2005).
225
See id. at 332.
226
See supra at Section II(b) and (c).
227
See Striking a Balance at 544.
228
See Cash Balance Plans: Implications for Retirement Income at 20-21.

37
nor will they have adequate time under the new cash balance plan to recover the
difference.229
There is evidence to confirm that reduction of pension costs is a factor for
companies moving to the cash balance model.230
However, companies have also noted
that such plans are being adopted in response to their changing worker demographics.231
For instance, cash balance plans are generally more beneficial to a growing mobile
workforce.232
Plans wishing to convert to a cash balance model may provide transition
credits or wear away benefits to minimize adverse effects on older or longer service
employees.233
A plan may also allow existing participants to make the choice as to
whether they wish to remain in the traditional plan or cash balance model.234
There has been a growing uncertainty surrounding the future of cash balance
plans due to recent class action litigation filed by affected participants alleging age
discrimination and other violations.235
Prior to 2004, the courts have predominately
upheld the validity of the cash balance design and conversion.236
However a recent
holding in Cooper v. IBM Pers. Pension Plan tends to put the continued existence of the
current form of cash balance plans in jeopardy.237
Cooper contradicts prior court
holdings, as well as governmental guidance, finding that cash balance plans are per se age
229
See id.
230
See id. at 18.
231
See id.
232
See id. at 27 (Benefit of a worker under multiple cash balance plans is almost 22% larger than under a
traditional defined benefit plan.).
233
See Striking a Balance at 546, 567-569 (Transition credits are normally provided, for a certain period of
time, in addition to the base and interest credits, and are based on the participant’s age and service. Wear
away provisions guarantee the participant the greater of their cash balance benefit or the accrued benefit
under the traditional plan at the time of conversion.).
234
See Cash Balance Plans: Implications for Retirement Income at 34-35.
235
See Eaton v. Onan Corp., 117 F. Supp. 2d 812, 818 (S.D. Ind. 2000).
236
See Eaton at 826; Engers v. AT&T Corp., 2000 LEXIS 10937, 4-5 (D.N.J. 2000).
237
See Cooper v. The IBM Pers. Pension Plan, 274 F. Supp. 2d 1010, 1021-1022 (S.D. Ill. 2003).

38
discriminatory and therefore violate ERISA.238
A subsequent decision in 2004 may
suggest that Cooper is more the anomaly rather than the final rule, yet the continuing
legal uncertainty is very problematic for employers who may be considering starting or
converting to a cash balance plan.239
Further complicating this lingering issue is the lack of definitive governmental
guidance. In mid-2004, the Treasury department withdrew proposed regulations,
promulgated in 2002, that created guidelines for cash balance plans to avoid violating
anti-discrimination rules.240
The IRS has also indicated that it will no longer issue
technical advice as to the qualified status of such plans until Congress has considered
these issues, which is anticipated to happen during 2005.241
In spite of its drawbacks for certain employee segments, the cash balance plan
may be the lesser “evil” for those wishing to keep some form of a defined benefit plan.242
The court in Cooper suggested to IBM that they could have accomplished the same cost
savings objectives that led to the cash balance conversion, by converting to a defined
238
See id. at 1022 (Court finds age discrimination because an equal contribution made to two employees
will be worth less to the older employee because the younger employee has a longer period to accumulate
interest.); ERIC, The ERISA Industry Committee Summary of Consensus on Legislative Proposals
Affecting Hybrid Pension Plans, available at
http://www.eric.org/forms/uploadFiles/33A500000009.filename.aug_10_consensus_position.pdf, at 2
(Aug. 10, 2004) [hereinafter “Summary of Consensus on Legislative Proposals Affecting Hybrid Pension
Plans”].
239
See Tootle v. Arnic, Inc., 222 F.R.D. 88, 93-94 (D. Md. 2004) (“The potential claim of age
discrimination arises only by applying a definition for accrued benefits which does not fit with the way
cash balance plans are structured. The more sensible approach is to measure benefit accrual under cash
balance plans by examining the rate at which amounts are allocated and the changes over time in an
individual's account balance, as the ERISA provisions designed for traditional defined contribution plans
would direct.”); Roger Fillion, Cash Imbalance: Outcome of IBM Case Could Ripple Through Nation,
Rocky Mountain News, at B1, Dec. 27, 2004.
240
See I.R.S. Announcement 2004-57, 2004-27 I.R.B. 15.
241
See id.
242
See Summary of Consensus on Legislative Proposals Affecting Hybrid Pension Plans at 1 (Cash balance
plans protect employees against investment risk, employee contributions are not required, provide normal
form of benefit as an annuity).

39
contribution plan.243
As a result of the proceedings, the company has done exactly that,
shifting a bit more responsibility onto newly hired employees.244
d. Shifting Away from the Traditional Defined Benefit Model
As discussed in earlier sections, the move away from traditional defined benefit
plans has not necessarily been embraced as a positive trend and many still insist that
initiatives should be put in place to foster and encourage both new and existing plans.245
Ignoring some of the inherent problems discussed in the prior sections, there is a growing
consensus that traditional defined benefit plans are not sustainable in today’s business
environment.246
The growth of the traditional defined benefit plan peaked in 1983, while
the numbers of defined contribution plans have continued to grow.247
Since that time,
101,000 single-employer pension plans, representing 7.5 million participants have
terminated.248
It is not coincidental that the end to the growth spurt of defined benefit plans
coincided with TEFRA and increased regulatory requirements.249
Defined benefit plans
inherently contain costs not attributed to defined contribution plans due to the formers
243
See Cooper at 1022.
244
See supra at note 237 Cash Imbalance: Outcome of IBM Case Could Ripple Through Nation (As of Jan.
1, 2005, new employees will no longer be placed in the cash balance plan and will only be able to
participate in company’s 401(k) plan.).
245
See David M. Strauss, Exec. Dir. PBGC, Prepared Statement Before Senate Labor and Human Resource
Committee (Mar. 17, 1998) (In his statement, Mr. Strauss established that a priority for the PBGC would be
to promote defined benefit coverage.); Chuck Grassley, Chairman, Financial Status of Pension Benefit
Guarantee Corporation, Opening Statement before Committee on Senate Finance, Mar. 1, 2005 (“Most of
those taxpayers do not have a stake in the defined benefit system. Only about 20 percent of workers have a
defined benefit plan today…. That's a sad and disturbing statement in itself. Hopefully, we can move that
percentage up a lot.”).
246
See Vince Calio, Tail Wags Dog: CFOs Down on DB Plans, Survey Says, Pensions and Investments, at
8, Jan. 10, 2005 (Based on a Dec. 2004 survey, of 100 CEOs surveyed that maintain defined benefit plans,
34% plan to close current pension to new members citing balance sheet pressures.).
247
See EBRI, EBRI Research Highlights: Retirement Benefits, available at
http://www.ebri.org/ibpdfs/0603ib.pdf, at 10 (Jun. 2003) (In 1983, the number of private defined benefit
plans in place was 175,143. This number has declined to 56,405 as of 1998.).
248
See Bradley Belt, Exec. Dir. PBGC, Single-Employer Pension Plan Restructuring, Testimony Before
House Ways and Means (Mar. 8, 2005).
249
See Most Employers Offer Defined Contribution Plans at 13.

40
actuarial component and PBGC premiums. Regulations surrounding funding rules cause
a form of unpredictability that can create the need for sudden unexpected contributions.
Reform required to shore up the PBGC’s solvency also threatens to create incentives for
companies to terminate remaining plans.250
For many companies, the monies available to
provide overall employee benefits is already stretched, especially given the continued rise
of healthcare premiums.251
Finally, given the prevalence of downsizing and outsourcing,
one also needs to evaluate whether a benefit geared towards providing incentives for long
term employment is appropriate for today’s employee.252
e. Social Security – The Next Generation Shift
The debate over the future form of Social Security has been reengaged in 2005.
On the forefront of the current administration’s agenda is the partial privatization of
Social Security in the form of individual participant accounts.253
The push for changes to
Social Security comes as a result of realizations that the program’s annual distributions to
beneficiaries will soon exceed revenues.254
Firm details of a proposal have not yet been
released, however the reoccurring theme of present discussion tends to suggest that the
mere migration to individual participant accounts will not sufficiently make up for this
gap.255
Consequently, it appears inevitable that current workers will eventually be
250
See Ron Gebhardtsbauer, Sr. Pension Fellow, American Academy of Actuaries, Single-Employer
Pension Plan Restructuring, Testimony Before House Ways and Means (Mar. 8, 2005).
251
See Joseph McCafferty, Taking on the Benefits Burden, CFO Magazine, Feb. 2005.
252
See supra note 14, Pension Tension (“While older employees often objected to pension terminations,
many younger workers preferred a bird in the 401(k) hand to two in the pension bush, especially given the
recent wave of layoffs.”).
253
See Glenn Kessler, Questions and Answers, Washington Post, at A8, Feb. 4, 2005.
254
See of Douglas Holtz-Eakin, The Future of Social Security, Congressional Budget Office Testimony, at
3, Feb. 3, 2005 (Estimated that outlays will exceed revenues by 2020.).
255
See Edmund L. Andrews, Bush Outlines Ways Cuts Could Close Funding Gap, New York Times, at
A14, Feb. 4, 2005 (Proposals generally range from an increase in the age retirees are able to collect Social
Security benefits to a reduction in the overall calculation of benefits.)

41
negatively impacted in some form, providing another unknown element for workers
trying to formulate a retirement financial strategy.
Beyond the potential reduction of Social Security benefits that future retirees may
face, the concept of private accounts brings with it many of the same concerns voiced
over defined contribution plans. For instance, it is estimated that a worker would have to
earn at least 3 percent over inflation to match what they would have earned under the
traditional Social Security system.256
Concerns have also been raised that moving to an
individual account model may lead to the potential reduction or elimination of employer
sponsored pension benefits.257
This would be a direct result of employers attempting to
defray newly incurred costs from increased administration responsibilities imposed under
the proposed Social Security system.258
Should employers find it necessary to take such
measures, the balance is once again shifted towards the employee to make up the loss in
benefits.
Theoretically Social Security may be one area that an employee does have greater
influence in curbing this shift in balance. Much like corporate pension changes, the
proposed changes to Social Security are being driven in an effort to reduce costs to the
sponsor. However there is a difference between a deferred benefit, provided by
employers in an effort to entice employees, and a societal benefit provided by the
government as a result of public policy. Unlike changes imposed by market conditions,
workers will have the power of their vote to determine whether or not they are willing to
accept this next shift in responsibility.
256
See David E. Rosenbaum, Memo Gives New Details on Workings of Bush Social Security Plan, New
York Times at A11, Feb. 5, 2005.
257
See Patrick J. Purcell, Social Security Individual Accounts and Employer-Sponsored Pensions,
Congressional Report Service, at 13, Feb. 3, 2005.
258
See id. at 6-7, 13.

42
V. Conclusion
Much as the form of retirement savings has evolved over the past century, so too
has the concept of retirement. The number of years a person spends in “retirement” has
continued to increase, as have the needs found for retirement income. A subtle shift has
also occurred, with more weight increasingly being placed on the personal savings
element. While experts continue to critique the distinct advantages and disadvantages to
each type of retirement vehicle in existence today, the simple truth remains that whatever
benefits are available will be contingent on the bargaining power of the employee and
continued public pressure on lawmakers to preserve the societal obligation to provide
some form of retirement benefits.
As demonstrated by the brief survey of attributes contained within the forms of
defined benefit and contribution plans, adequate benefits can be obtained when coupled
with a solvent form of Social Security and personal savings. Inherent in this potential
success lays the responsibility of the employee to understand the needs and risks
associated with their retirement assets. Unfortunately some of these risks remain hidden,
especially in defined benefit plans. Assuming Congress is able to restore some
semblance of stability to the PBGC and defined benefit plans, history suggests that
problems can reappear suddenly and with devastating consequences to unwary
participants. Social Security has not yet suffered the same fate, however its current
funding status dictates that future retirees, currently in the workforce, will suffer some
form of reduced benefit.
Whether defined benefit plans are rekindled or not, the employee can never be
absolved of understanding and taking necessary steps to secure their retirement.

43
Employers and the federal government share in this responsibility by ensuring the safety
and predictability of any benefits promised to the employee. To that end, this duty is
critical in the case of mid and end career employees who are unable to properly
compensate when such promises are revoked. For the remainder of the workforce,
retirement security can only be obtained with the employee’s ability to understand what
portion of the retirement burden has shifted into their hands and the tools necessary to act
on this information.

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