Erisa at 30 : The Decline of Private-Sector Defined Benefit Promises and Annuity Payments? What Will it Mean?

This paper begins with an overview of the private defined benefit plan system, with an emphasis on the various types of retirement income risk that exist and whether they are addressed (and if so, how effectively) by various plan designs. The focus then turns to issues concerning sponsoring, funding, and providing benefits to participants under the private defined benefit system. Pension accounting and its potential impact on the plan sponsor's income statement is described first, followed by the minimum funding requirements for qualified defined benefit plans. Cash balance plans are treated next and the available empirical evidence regarding their potential impact on plan participants is reviewed. Finally, the paper uses variants of the EBRI-ERF Retirement Income Projection Model (RIPM) and Retirement Security Projection Model (RSPM) to provide quantitative assessments of the future financial security implications of various types of moves away from defined benefit promises and from annuity payments ("traditional" employer-provided pensions) - a long-term trend that has been well-documented since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974, and which has been accelerating in recent years for a variety of reasons. This analysis provides preliminary results on the impact of benefit accrual freezes for pension plans, modifications to cash balance plans, lump-sum distributions of retirement benefits, and payment of retirement accumulations as life annuities. Decisions are needed on the status of cash balance pension plans, permanent funding rules, and interest rates to be used in plan calculations, accounting treatment related to using smoothing versus mark-to-market for investment returns and interest rates, and rules and premiums under Title IV of ERISA and the Pension Benefit Guaranty Corporation. Until these kinds of policy decisions are made, further erosion of the defined benefit system can be expected to continue