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Taking Care of Mom and Dad: Some Background

The Employee Retirement Income Security Act (ERISA) of 1974 changed the way pension plans were managed and secured. Until 1974, there was little or no protection for pensions. Many workers could lose their retirement benefits -- and had no legal recourse if they did. With ERISA, Congress set strict requirements for private pension plans, making the U.S. Department of Labor (DOL) responsible for seeing that the plans were properly operated and that their assets were managed in a prudent manner. The Internal Revenue Service (IRS) was made responsible for regulating pension plan funding and vesting requirements...and for ensuring compliance with tax laws.

ERISA also established the Pension Benefit Guaranty Corporation (PBGC) to insure the pensions of workers covered by privately defined benefit pension plans.

Under ERISA, companies are required to fund pension plans; any assets that are part of the plan are invested to be able to meet benefit needs in the future. All plans covered by ERISA are kept in some form of trust and the monies invested, usually by professional money managers. If the plans meet basic guidelines, they are insured by PBGC.

Typically, there are two kinds of pension plans: single-employer plans or multi-employer plans. A single-employer plan, which can be collectively bargained, provides benefits for workers of one employer. A multi-employer plan, on the other hand, is usually a collectively bargained pension arrangement involving more than one unrelated employer. In this context, collectively bargained means the benefits are negotiated (and sometimes administered) by a labor union representing the employees covered by the plan.

The chief advantage oftraditional pensions is that they offer workers a specific, predictable benefit for life. On the other hand, workers in defined contribution plans -- like 401(k)s -- have individual accounts funded with their own contributions and perhaps matching contributions from their employer. The ultimate benefit available to people with defined contribution plans depends on the amounts contributed by the employee and the investment returns on those contributions.

Compared to defined contribution plans, traditional pensions are much more reliable. To clarify the difference: In defined contribution plans, the financial risk -- that investments decline or that contributions won't provide enough income in retirement -- is borne by the worker.

Defined contribution plans became very popular during the 1980s and 1990s. As a result, the American pension system has shifted away from traditional pensions and toward defined contribution plans. According to the federal government, the number of defined benefit plans declined from 175,000 to 59,500 between 1983 and 1997.

The decline in the number of defined benefits plans resulted mainly from the termination of a large number of small plans. However, while the decline in the number of plans was larger among small plans, the decline in the number of participants was greater among large plans. The number of active participants in small defined benefits plans fell from 1.8 million in 1983 to 660,000 in 1997. In the same period, the number of active participants in large defined benefits plans fell from 28 million to 22 million.

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