Chances are that if you worked for a large company in the mid-1980s, you were covered by a defined benefit pension plan. These plans provide retirement income and were considered the gold standard for financial retirement security. In recent years, the number of companies offering these plans has plummeted.

Definition

A pension benefit plan guarantees a set monthly income for life. Generally, it is funded in total by the employer, who sets aside and then invests funds during an employee's tenure. At retirement, the employer purchases an "annuity," which is an investment that provides a set size and frequency of payments, usually monthly, for the remainder of the employee's life.

How is the Benefit Determined?

Salary level, years of service and age at retirement all help determine the benefit amount. Companies also may employ different factors (e.g., a reduced pension for early retirement).

History

Pensions have enjoyed a long history in the United States, beginning with benefits for pre-Revolutionary War militias. American Express was the first large employer to offer defined plans, and by 1930, almost all large employers provided this retirement benefit.

What is Causing the Demise?

Defined pension plans are expensive, and the investment returns are uncertain. Many companies have switched to defined contribution pension plans, for which the employer contributes a fixed percent of income during an employee's tenure. The employee also contributes to the plan and is responsible for all investment decisions.

Other Facts

While private industry participation has tumbled, public employees largely continue to participate in defined benefit plans. Defined benefit pensions provided by companies that have gone bankrupt are mostly guaranteed by the Pension Benefit Guaranty Corp, but are subject to limitations. The PBGC is a federal, government-administered corporation that is primarily funded by premiums paid by companies that offer defined benefit pensions. For example, defined benefit pensions from several airlines and steel companies that have gone bankrupt have now been taken over by the PBGC.

Source:

Pension history, trends and facts

Retirement plans/PBGC

Financial definitions

Resource:

Demise of defined benefit plans

Pension Benefit Guaranty Corporation