Abstract

http://ssrn.com/abstract=1422697
 


 



The Death Knell of Traditional Defined Benefit Plans: Avoiding a Race to the 401(k) Bottom


Janice Kay McClendon


Stetson University College of Law

June 19, 2009

Temple Law Review, Vol. 80, No. 3, 2007

Abstract:     
In August of 2006, President Bush signed into law the most sweeping reform of America’s pension laws in over 30 years. Touted as the cure-all to pension funding ills and Enron-type scandals, the Pension Protection Act of 2006 (“Act”) is designed to strengthen defined benefit plans and the federal corporation that backs the benefits under those plans by increasing funding requirements and employer deductibility limitations. The Act also includes provisions designed to strengthen defined contribution plans, such as 401(k) plans.

Although well-intended, the Act will do little to slow down employers’ mass exodus from the defined benefit plan system. Over the past 20 years, both struggling and healthy companies have abandoned defined benefit plan sponsorship. In 2005 and 2006 alone, United Airways, US Airways, IBM and Verizon were among the companies that either terminated their defined benefit plans or froze plan benefit accruals. General Motors, America’s largest defined benefit plan sponsor, is now facing a financial crisis that may affect its 600,000 plan participants. With its more burdensome and costly requirements, the Act will hasten the death knell of traditional defined benefit plans as more employers face mounting and uncertain liabilities under these plans. Further, the Act does little to promote retirement security for defined contribution plans. Increasingly more common, employers are abandoning defined benefit plan sponsorship in favor of defined contribution plans. These plans provide little in the way of retirement security. Over the last five years, thousands of employees have invested plan assets in employer securities. With the downfall of companies such as Enron, WorldCom, and the poor performance of other companies such as Lucent Technologies and Qwest Communications, these employees have lost a large part of their retirement savings. Other employees have pilfered their retirement savings by consuming their account balances in pre-retirement years through in-service distributions, plan loans, hardship distributions and distributions on termination of employment. While the Act encourages employer-facilitated investment advice and promotes some level of plan asset diversification, it does little to ensure that plan participants will accrue significant benefits for post-retirement years.

This Article looks at America’s loss of retirement security stemming from the shift away from traditional defined benefit plan sponsorship and the embracement of defined contribution plan sponsorship. It also looks at the root causes underlying the shift and how the Act fails to adequately address the looming pension crisis. Finally, the Article, recommends additional legislative changes that increase the retirement security provided under employer-sponsored defined contribution plans.

Number of Pages in PDF File: 37

Keywords: Pension Protection Act of 2006, employee benefits plans, retirement

JEL Classification: K31, J26

Accepted Paper Series





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Date posted: June 23, 2009  

Suggested Citation

McClendon, Janice Kay, The Death Knell of Traditional Defined Benefit Plans: Avoiding a Race to the 401(k) Bottom (June 19, 2009). Temple Law Review, Vol. 80, No. 3, 2007. Available at SSRN: http://ssrn.com/abstract=1422697

Contact Information

Janice Kay McClendon (Contact Author)
Stetson University College of Law ( email )
1401 61st Street South
Gulfport, FL 33707
United States
727-562-7364 (Phone)
727-347-3738 (Fax)

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