Pension Benefit Guaranty Corporation
Encyclopedia
The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act
of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension
plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, the PBGC insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($54,000 a year as of 2011). The benefits payable to insured retirees who start their benefits at ages other than 65, or who elect survivor coverage, are adjusted to be equivalent in value.
During fiscal year 2010, the PBGC paid $5.6 billion in benefits to participants of failed pension plans. That year, 147 pension plans failed, and the PBGC's deficit increased 4.5 percent to $23 billion. The PBGC has a total of $102.5 billion in obligations and $79.5 billion in assets.
revenues. Its funds come from four sources:
PBGC pays monthly retirement benefits to approximately 631,000 retirees of 3,800 terminated defined benefit pension plans. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, the PBGC is responsible for the current and future pensions of about 1.3 million people.
The PBGC regularly updates its investment strategy. In 2004, it chose to invest heavily in bonds. Under new leadership, the agency in 2008 shifted a substantial portion of its assets into stocks. Because of the market decline, PBGC's equity investments lost 23% during the year ending September 30, 2008.
agreements involving more than one unrelated employer, generally in one industry.
payment or an insurance company annuity, PBGC's guarantee ends. In a distress termination, where the plan does not have enough money to pay all benefits, the employer must prove severe financial distress - for instance the likelihood that continuing the plan would force the company to shut down. PBGC will pay guaranteed benefits, usually covering a large part of total earned benefits, and make strong efforts to recover funds from the employer.
In addition, PBGC may seek to terminate a single-employer plan without the employer's consent to protect the interests of workers, the plan or PBGC's insurance fund. PBGC must act to terminate a plan that cannot pay current benefits.
For multiemployer pension plans that are unable to pay guaranteed benefits when due, PBGC will provide financial assistance to the plan, usually a loan, so that retirees continue receiving their benefits.
Terminations are covered under Title IV of ERISA.
Benefit payments starting at ages other than 65 are adjusted actuarially, which means the maximum guaranteed benefit is lower for those who retire early or when there is a benefit for a survivor. Likewise, the maximum guaranteed benefit is higher for those who retire after age 65. Additionally, the PBGC will not fully guarantee benefit improvements that were adopted within the five-year period prior to a plan's termination or benefits that are not payable over a retiree's lifetime.
For the multiemployer plans, the amount guaranteed is based on years of service. For plans that terminate after December 21, 2000, the PBGC insures 100 percent of the first $11 monthly payment per year of service and 75 percent of the next $33 monthly payment per year of service. For example, if a participant works 20 years in a plan that promises $19 per month per year of service, the PBGC guarantee would be $340 per month.
Multiemployer plans that terminated after 1980 but before December 21, 2000, had a maximum guarantee limit of 100 percent of the first $5 of the monthly benefit accrual rate and 75 percent of the next $15.
consisting of the Secretaries of Labor
, Commerce
and Treasury
, with the Secretary of Labor as chairman
.
Under the Pension Protection Act of 2006
, the Director of the PBGC is appointed by the President
and confirmed by the Senate
. Under prior law, PBGC's Board Chairman appointed an "Executive Director" who was not subject to confirmation.
Charles E. F. Millard became the first Senate-confirmed Director on December 14, 2007. Prior to coming to PBGC, Millard was managing director at Broadway Partners, LLC. He previously held leadership positions at Lehman Brothers
, the New York City Economic Development Corporation
, and Prudential Securities
. In addition, Millard served two terms on the New York City Council
.
Joshua Gotbaum was appointed as the current Director on July 2, 2010 through a recess appointment
. Gotbaum served in both the Carter and Clinton administrations in a variety of financial service positions and led the bankruptcy reorganization of Hawaiian Airlines
.
The PBGC would like required contributions (a.k.a. minimum contributions) to insured defined benefit pension plans to be considered "administrative expenses" in bankruptcy, thereby obtaining priority treatment ahead of the unsecured creditors. The PBGC has generally lost on this argument, sometimes resulting in a benefit to general unsecured creditors.
In National Labor Relations Bd. v. Bildisco, 465 U.S. 513 (1984), the U.S. Supreme Court ruled that Bankruptcy Code section 365(a) "includes within it collective-bargaining agreements subject to the National Labor Relations Act, and that the Bankruptcy Court may approve rejection of such contracts by the debtor-in-possession upon an appropriate showing." The ruling came in spite of arguments that the employer should not use bankruptcy to breach contractual promises to make pension payments resulting from collective bargaining.
General bankruptcy principles hold that executory contracts are avoidable in practice, because neither party has fulfilled its part of the bargain and thus breach by either party only gives rise to expectation damages. Damages awards after commencement of a bankruptcy filing results in claims that take after more senior creditors. They are relegated to the status of general creditors because while breach would occur after filing of the bankruptcy petition, the contract was entered into before the filing. If a creditor is a general unsecured creditor and there is not enough money, they usually are not paid; so as a matter of practical economics, if the downturn in a company's fortunes which resulted in bankruptcy makes the performance of an executory contract less valuable than its breach, the rational company would breach. There would be no negative monetary consequences of such breach because there would be no money left for the other contract party to take because in practice general unsecured creditors are left with nothing.
US Airways has so far resisted in court in making those required minimum contributions to their legacy pensions.
In Bildisco the Court also ruled that under the Bankruptcy Code as written at that time, an employer in Chapter 11 bankruptcy "does not commit an unfair labor practice when, after the filing of a bankruptcy petition but before court-approved rejection of the collective-bargaining agreement, it unilaterally modifies or terminates one or more provisions of the agreement." After the Bildisco decision, Congress amended the Bankruptcy Code by adding a subsection (f) to section 1113 (effective for cases that commenced on or after July 10, 1984):
According to commentator Nicholas Brannick, "Despite the appearance of protection for the PBGC's interest in the event of termination, the Bankruptcy Code frequently strips the PBGC of the protection provided under ERISA. Under ERISA, termination liability may arise on the date of termination, but the lien that protects the PBGC's interest in that liability must be perfected
[to be protected in bankruptcy]". Nicholas Brannick, Note: At the Crossroads of Three Codes: How Employers Are Using ERISA, the Tax Code, and Bankruptcy to Evade Their Pension Obligations, 65 Ohio St. L.J. 1577, 1606 (2004). The retention of title as a security interest, the creation of lien, or any other direct or indirect mode of disposing of or parting with property or an interest in property is a "transfer" for purposes of the U.S. Bankruptcy Code (see ). Some transfers may be avoidable by the bankruptcy trustee under various Code provisions. Further, under ordinary principles of bankruptcy law, a lien or other security interest that is unperfected (i.e., a lien that is not valid against parties other than the debtor) at the time of case commencement is generally unenforceable against a bankruptcy trustee. Once the bankruptcy case has commenced, the law generally stays any act to attempt to perfect a lien that was not perfected prior to case commencement (see ). Thus, the PBGC with a lien that has not yet been perfected at the time of case commencement may find itself in the same position as the general unsecured creditors.
The multi-employer section, the M sections, follow a similar organization.
The article usually is a research paper or an extended explanation of operations at the PBGC.
represents the most significant pension legislation since ERISA. Some of the provisions of the Act that affect the PBGC include:
in a relatively short period of time. Before ERISA, employers and willing unions could agree to increase benefits with little thought to how to pay for them. A classic case of the unfortunate consequences of an underfunded pension plan is the 1963 shutdown of Studebaker
automobile operations in South Bend, Indiana
, in which 4,500 workers lost 85% of their vested benefits. One of ERISA's stated intentions was to minimize underfunding in defined benefit plans.
Defined contribution plans — by contrast and by definition — are always "fully funded." Thus Congress saw no need to provide insurance protection for participants in defined contribution plans. The Enron scandal
in 2001 demonstrated one potential problem with defined contribution plans: the company had strongly encouraged its workers to invest their 401(k)
plans in their employer itself, violating primary investment guidelines about diversification. When Enron went bankrupt, many workers lost not just their jobs but also most of the value of their retirement savings. Congress inserted trust law fiduciary liability upon employers who did not prudently diversify plan assets to avoid the chance of large losses inside Section 404 of ERISA, but it is unclear whether such fiduciary liability applies to trustees of plans in which participants direct the investment of their own accounts.
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, the PBGC insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($54,000 a year as of 2011). The benefits payable to insured retirees who start their benefits at ages other than 65, or who elect survivor coverage, are adjusted to be equivalent in value.
During fiscal year 2010, the PBGC paid $5.6 billion in benefits to participants of failed pension plans. That year, 147 pension plans failed, and the PBGC's deficit increased 4.5 percent to $23 billion. The PBGC has a total of $102.5 billion in obligations and $79.5 billion in assets.
Revenues and expenditures
The PBGC is not funded by general taxTaxation in the United States
The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
revenues. Its funds come from four sources:
- Insurance premiums paid by sponsors of defined benefit pension plans;
- Assets held by the pension plans it takes over;
- Recoveries of unfunded pension liabilities from plan sponsors' bankruptcy estates; and
- Investment income.
PBGC pays monthly retirement benefits to approximately 631,000 retirees of 3,800 terminated defined benefit pension plans. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, the PBGC is responsible for the current and future pensions of about 1.3 million people.
The PBGC regularly updates its investment strategy. In 2004, it chose to invest heavily in bonds. Under new leadership, the agency in 2008 shifted a substantial portion of its assets into stocks. Because of the market decline, PBGC's equity investments lost 23% during the year ending September 30, 2008.
Pension insurance programs
The single-employer program protects 34.0 million workers and retirees in 28,800 pension plans. The multiemployer program protects 9.9 million workers and retirees in 1,540 pension plans. Multiemployer plans are set up by collectively bargainedCollective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
agreements involving more than one unrelated employer, generally in one industry.
Plan terminations
An employer can voluntarily ask to close its single-employer pension plan in either a standard or distress termination. In a standard termination, the plan must have enough money to pay all accrued benefits, whether vested or not, before the plan can end. After workers receive promised benefits, in the form of a lump sumLump sum
A lump sum is a single payment of money, as opposed to a series of payments made over time .The United States Department of Housing and Urban Development distinguishes between "price analysis" and "cost analysis" by whether the decision maker compares lump sum amounts, or subjects contract prices...
payment or an insurance company annuity, PBGC's guarantee ends. In a distress termination, where the plan does not have enough money to pay all benefits, the employer must prove severe financial distress - for instance the likelihood that continuing the plan would force the company to shut down. PBGC will pay guaranteed benefits, usually covering a large part of total earned benefits, and make strong efforts to recover funds from the employer.
In addition, PBGC may seek to terminate a single-employer plan without the employer's consent to protect the interests of workers, the plan or PBGC's insurance fund. PBGC must act to terminate a plan that cannot pay current benefits.
For multiemployer pension plans that are unable to pay guaranteed benefits when due, PBGC will provide financial assistance to the plan, usually a loan, so that retirees continue receiving their benefits.
Terminations are covered under Title IV of ERISA.
Premium rates
Pension plans pay PBGC yearly insurance premiums. For 2011, the premium rate is $9 per participant for multiemployer plans; single-employer plans pay $35 per participant plus $9 for each $1,000 of unfunded vested benefits. The per-participant rates are indexed for inflation.Maximum guaranteed benefit
The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. For plans that end in 2011, workers who retire at age 65 can receive up to $4,500 per month (or $54,000 per year) under PBGC's insurance program for single-employer plans.Benefit payments starting at ages other than 65 are adjusted actuarially, which means the maximum guaranteed benefit is lower for those who retire early or when there is a benefit for a survivor. Likewise, the maximum guaranteed benefit is higher for those who retire after age 65. Additionally, the PBGC will not fully guarantee benefit improvements that were adopted within the five-year period prior to a plan's termination or benefits that are not payable over a retiree's lifetime.
For the multiemployer plans, the amount guaranteed is based on years of service. For plans that terminate after December 21, 2000, the PBGC insures 100 percent of the first $11 monthly payment per year of service and 75 percent of the next $33 monthly payment per year of service. For example, if a participant works 20 years in a plan that promises $19 per month per year of service, the PBGC guarantee would be $340 per month.
Multiemployer plans that terminated after 1980 but before December 21, 2000, had a maximum guarantee limit of 100 percent of the first $5 of the monthly benefit accrual rate and 75 percent of the next $15.
Leadership
PBGC is headed by a Director, who reports to a board of directorsBoard of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
consisting of the Secretaries of Labor
United States Secretary of Labor
The United States Secretary of Labor is the head of the Department of Labor who exercises control over the department and enforces and suggests laws involving unions, the workplace, and all other issues involving any form of business-person controversies....
, Commerce
United States Secretary of Commerce
The United States Secretary of Commerce is the head of the United States Department of Commerce concerned with business and industry; the Department states its mission to be "to foster, promote, and develop the foreign and domestic commerce"...
and Treasury
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
, with the Secretary of Labor as chairman
Chairman of the Board
The Chairman of the Board is a seat of office in an organization, especially of corporations.Chairman of the Board may also refer to:*Chairman of the Board , a 1998 film*Chairmen of the Board , a 1970s American soul music group...
.
Under the Pension Protection Act of 2006
Pension Protection Act of 2006
The Pension Protection Act of 2006 , 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.-Pension reform:...
, the Director of the PBGC is appointed by the President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
and confirmed by the Senate
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
. Under prior law, PBGC's Board Chairman appointed an "Executive Director" who was not subject to confirmation.
Charles E. F. Millard became the first Senate-confirmed Director on December 14, 2007. Prior to coming to PBGC, Millard was managing director at Broadway Partners, LLC. He previously held leadership positions at Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
, the New York City Economic Development Corporation
New York City Economic Development Corporation
New York City Economic Development Corporation is a non-profit local development corporation that promotes economic growth across New York City's five boroughs. It is the City's official Economic development corporation, charged with using the City's assets to drive growth, create jobs, and...
, and Prudential Securities
Prudential Financial
The Prudential Insurance Company of America , also known as Prudential Financial, Inc., is a Fortune Global 500 and Fortune 500 company whose subsidiaries provide insurance, investment management, and other financial products and services to both retail and institutional customers throughout the...
. In addition, Millard served two terms on the New York City Council
New York City Council
The New York City Council is the lawmaking body of the City of New York. It has 51 members from 51 council districts throughout the five boroughs. The Council serves as a check against the mayor in a "strong" mayor-council government model. The council monitors performance of city agencies and...
.
Joshua Gotbaum was appointed as the current Director on July 2, 2010 through a recess appointment
Recess appointment
A recess appointment is the appointment, by the President of the United States, of a senior federal official while the U.S. Senate is in recess. The U.S. Constitution requires that the most senior federal officers must be confirmed by the Senate before assuming office, but while the Senate is in...
. Gotbaum served in both the Carter and Clinton administrations in a variety of financial service positions and led the bankruptcy reorganization of Hawaiian Airlines
Hawaiian Airlines
Hawaiian Airlines, Inc. is a major airline of the United States. It is the largest airline based in the State of Hawai'i, and is the 11th largest commercial airline in the country. Based in Honolulu CDP, City and County of Honolulu, the airline operates its main hub at Honolulu International...
.
Pensions and bankruptcy
Several large legacy airlines have filed for bankruptcy reorganization in an attempt to renegotiate terms of pension liabilities. These debtors have asked the bankruptcy court to approve the termination of their old defined benefit plans insured by the PBGC. The PBGC has attempted to resist these requests.The PBGC would like required contributions (a.k.a. minimum contributions) to insured defined benefit pension plans to be considered "administrative expenses" in bankruptcy, thereby obtaining priority treatment ahead of the unsecured creditors. The PBGC has generally lost on this argument, sometimes resulting in a benefit to general unsecured creditors.
In National Labor Relations Bd. v. Bildisco, 465 U.S. 513 (1984), the U.S. Supreme Court ruled that Bankruptcy Code section 365(a) "includes within it collective-bargaining agreements subject to the National Labor Relations Act, and that the Bankruptcy Court may approve rejection of such contracts by the debtor-in-possession upon an appropriate showing." The ruling came in spite of arguments that the employer should not use bankruptcy to breach contractual promises to make pension payments resulting from collective bargaining.
General bankruptcy principles hold that executory contracts are avoidable in practice, because neither party has fulfilled its part of the bargain and thus breach by either party only gives rise to expectation damages. Damages awards after commencement of a bankruptcy filing results in claims that take after more senior creditors. They are relegated to the status of general creditors because while breach would occur after filing of the bankruptcy petition, the contract was entered into before the filing. If a creditor is a general unsecured creditor and there is not enough money, they usually are not paid; so as a matter of practical economics, if the downturn in a company's fortunes which resulted in bankruptcy makes the performance of an executory contract less valuable than its breach, the rational company would breach. There would be no negative monetary consequences of such breach because there would be no money left for the other contract party to take because in practice general unsecured creditors are left with nothing.
US Airways has so far resisted in court in making those required minimum contributions to their legacy pensions.
In Bildisco the Court also ruled that under the Bankruptcy Code as written at that time, an employer in Chapter 11 bankruptcy "does not commit an unfair labor practice when, after the filing of a bankruptcy petition but before court-approved rejection of the collective-bargaining agreement, it unilaterally modifies or terminates one or more provisions of the agreement." After the Bildisco decision, Congress amended the Bankruptcy Code by adding a subsection (f) to section 1113 (effective for cases that commenced on or after July 10, 1984):
-
- "(f) No provision of this title shall be construed to permit a trustee to unilaterally terminate or alter any provisions of a collective bargaining agreement prior to compliance with the provisions of this section."
According to commentator Nicholas Brannick, "Despite the appearance of protection for the PBGC's interest in the event of termination, the Bankruptcy Code frequently strips the PBGC of the protection provided under ERISA. Under ERISA, termination liability may arise on the date of termination, but the lien that protects the PBGC's interest in that liability must be perfected
Perfection (law)
In law, perfection relates to the additional steps required to be taken in relation to a security interest in order to make it effective against third parties and/or to retain its effectiveness in the event of default by the grantor of the security interest...
[to be protected in bankruptcy]". Nicholas Brannick, Note: At the Crossroads of Three Codes: How Employers Are Using ERISA, the Tax Code, and Bankruptcy to Evade Their Pension Obligations, 65 Ohio St. L.J. 1577, 1606 (2004). The retention of title as a security interest, the creation of lien, or any other direct or indirect mode of disposing of or parting with property or an interest in property is a "transfer" for purposes of the U.S. Bankruptcy Code (see ). Some transfers may be avoidable by the bankruptcy trustee under various Code provisions. Further, under ordinary principles of bankruptcy law, a lien or other security interest that is unperfected (i.e., a lien that is not valid against parties other than the debtor) at the time of case commencement is generally unenforceable against a bankruptcy trustee. Once the bankruptcy case has commenced, the law generally stays any act to attempt to perfect a lien that was not perfected prior to case commencement (see ). Thus, the PBGC with a lien that has not yet been perfected at the time of case commencement may find itself in the same position as the general unsecured creditors.
Annual Pension Insurance Data Book
The PBGC has published the Pension Insurance Data Book since 1996 to present detailed statistics on PBGC's programs, operations, and benefits on single-employer and multi-employer plans. The data book is broken into four main sections; Figures, Single Employer plans, Multiemployer plans, and a research article. The figures section displays all statistics at a glance. Obvious trends are the precipitous decline in the enrollment of employees in defined benefit (DB plans)over the past 20 years and the spike in PBGC deficit during times of recession/defaults. The single employer section gives all data and statics on single employer programs.- Section S-3 through S-19 are the claims tables. The show all of the claim brought by single employer DB plans to PBGC.
- Section S-20 through S-29 are the payment table. These table show how much PBGC is paying out every year in insurance protection.
- Section S-30 through S-38 are the insured tables. These table show how many participants are insured under the PBGC.
- Section S-40 through S-44 Premium tables. These table show how much premiums the insured pension plans are paying.
- Section S-45 though S-52 Show the underfunded Plans, overfunded Plans, and the funding ratios by NAIC business code, state, and participant count.
The multi-employer section, the M sections, follow a similar organization.
The article usually is a research paper or an extended explanation of operations at the PBGC.
Pension Protection Act of 2006
The Pension Protection Act of 2006Pension Protection Act of 2006
The Pension Protection Act of 2006 , 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.-Pension reform:...
represents the most significant pension legislation since ERISA. Some of the provisions of the Act that affect the PBGC include:
- The methodology for calculating the "variable-rate" PBGC premium is changed.
- The PBGC's guarantee of pension benefits that become payable on a plant shutdown is limited.
- If the PBGC takes over a terminated plan, employees' pension benefits are frozen as of the date of the plan sponsor's bankruptcy filing (which may be months or even years before the plan terminates).
- The complicated rules that govern the PBGC's pension guarantee for business owners are simplified.
- If the PBGC takes over a terminated plan, the plan sponsor is required to pay a "termination premium" of $1,250 per participant per year for three years.
No insurance for defined contribution plans
One reason Congress enacted ERISA was "to prevent the 'great personal tragedy' suffered by employees whose vested benefits are not paid when pension plans are terminated." When a defined benefit plan is properly funded by its sponsor, its assets should be approximately equal to its liability, and any shortfall (including benefit improvements) should be amortizedAmortization (business)
In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and amortization of intangible assets.-Amortization of loans:...
in a relatively short period of time. Before ERISA, employers and willing unions could agree to increase benefits with little thought to how to pay for them. A classic case of the unfortunate consequences of an underfunded pension plan is the 1963 shutdown of Studebaker
Studebaker
Studebaker Corporation was a United States wagon and automobile manufacturer based in South Bend, Indiana. Founded in 1852 and incorporated in 1868 under the name of the Studebaker Brothers Manufacturing Company, the company was originally a producer of wagons for farmers, miners, and the...
automobile operations in South Bend, Indiana
South Bend, Indiana
The city of South Bend is the county seat of St. Joseph County, Indiana, United States, on the St. Joseph River near its southernmost bend, from which it derives its name. As of the 2010 Census, the city had a total of 101,168 residents; its Metropolitan Statistical Area had a population of 316,663...
, in which 4,500 workers lost 85% of their vested benefits. One of ERISA's stated intentions was to minimize underfunding in defined benefit plans.
Defined contribution plans — by contrast and by definition — are always "fully funded." Thus Congress saw no need to provide insurance protection for participants in defined contribution plans. The Enron scandal
Enron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world...
in 2001 demonstrated one potential problem with defined contribution plans: the company had strongly encouraged its workers to invest their 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
plans in their employer itself, violating primary investment guidelines about diversification. When Enron went bankrupt, many workers lost not just their jobs but also most of the value of their retirement savings. Congress inserted trust law fiduciary liability upon employers who did not prudently diversify plan assets to avoid the chance of large losses inside Section 404 of ERISA, but it is unclear whether such fiduciary liability applies to trustees of plans in which participants direct the investment of their own accounts.
See also
- Pension (United States)
- Bankruptcy in the United StatesBankruptcy in the United StatesBankruptcy in the United States is governed under the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
- Federal Deposit Insurance CorporationFederal Deposit Insurance CorporationThe Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
- Social insuranceSocial insuranceSocial insurance is any government-sponsored program with the following four characteristics:* the benefits, eligibility requirements and other aspects of the program are defined by statute;...
- Securities Investor Protection CorporationSecurities Investor Protection CorporationThe Securities Investor Protection Corporation is a federally mandated, non-profit, member-funded, corporation in the United States. It protects investors in certain securities from financial harm if a broker-dealer fails...