Monday, April 2, 2018

The Financial Burden of Defined Benefit Plans

Defined benefit plans were the predominant retirement plan at the time the Employee Retirement Income Security Act (ERISA) was introduced in 1974. Many hospitals and other healthcare provider organizations in New York State had defined benefit pension plans. In a defined benefit plan, the total financial obligation falls strictly on the sponsor. The amount of benefit is stipulated and the funding of that benefit is the responsibility of the sponsor. As time went on, defined benefit plans became more onerous to maintain, more difficult to sponsor, and more expensive.

The Revenue Act of 1978 included a provision under which employees were not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments, thus making 401(k) plans possible. The emergence of defined contribution plans began a transition away from the plan sponsor offering and managing the retirement benefits, to participants having the ability to directly manage their retirement savings.