Who Sold Us This Idea? · Pensions and the 401(k)

Who sold us the 401(k)?

In 1975 seven in ten workers in a workplace retirement plan were earning a pension. By 2022 it was about one in ten. Move the idea through the people who carried it, from the pension as a promise to the 401(k) as an account.

Who thought of the idea?

Slide through time, drag the blue idea across the map, or use the arrow keys. Each bubble is sized by the figure in the chart below at that point: a ~ marks an estimate and ? means no data yet. Lanes are kinds of institutions. Solid lines hand the idea straight to the next carrier; dashed lines are a push in parallel.

?

one worker in a plan who earns a pension

What happened to the pension

Share of active participants in private-sector retirement plans who were in a defined benefit pension rather than a 401(k)-type plan, from Department of Labor Form 5500 data, 1975 to 2022. The department revised how it counts participants in 2004, so later years are not a perfect match for earlier ones. Before 1975 there is no comparable series.

Never for everyoneEven at the 1979 peak, only about half of private-sector workers had a retirement plan of any kind, according to Boston College’s Center for Retirement Research.

The crossoverIn 1984, for the first time, more workers were active in 401(k)-type plans (30.5 million) than in pensions (30.1 million), by the Labor Department’s count.

A slow fade, not a single killThe number of pension plans peaked at 175,143 in 1983 and fell to 46,508 by 2022. No one law ended them. Tax rules, consultants, raiders and boardrooms each moved them one step.

Context: the research notes

The promise

  1. 1875
    American Express

    Creates the first private pension plan in the United States. ThinkAdvisor

  2. 1948 to 1949
    Inland Steel and the NLRB

    The courts uphold the labor board: pensions are something unions can bargain over. Inland Steel v. NLRB

  3. 1950
    Walter Reuther, United Auto Workers

    The “Treaty of Detroit” with General Motors trades labor peace for pensions and health care. Ford and Chrysler follow. Treaty of Detroit

  4. 1963
    Studebaker, South Bend

    The plant closes and its pension plan fails. More than 8,500 auto workers lose some or all of their benefits. PBGC

  5. 1974
    Sen. Jacob Javits; President Gerald Ford

    ERISA becomes law and creates federal insurance for private pensions. PBGC history

The turn to the account

  1. 1978
    Congress; President Jimmy Carter

    The Revenue Act of 1978 adds Section 401(k), a narrow rule about deferred pay. ICI

  2. 1980 to 1981
    Ted Benna, benefits consultant; the IRS

    Benna reads the rule as a way for any worker to save from their own paycheck, with an employer match. IRS rules in November 1981 make it official. Gusto, ICI

  3. 1980s
    Corporate raiders and employers; Sen. Howard Metzenbaum

    More than $20 billion in surplus is taken back from terminated pensions. Congress starts taxing these reversions in 1986. GAO, SOA

  4. 1980s
    Kwasha Lipton, consultants; Bank of America

    The cash balance plan: a pension designed to look like an account, sold to dozens of employers. Kwasha Lipton

  5. 1999 to 2004
    IBM; Kathi Cooper and 140,000 employees

    IBM's switch to cash balance is challenged as age discrimination. IBM settles and takes a $320 million charge. Workforce

  6. 2004 to 2011
    Fortune 1000 boardrooms

    Companies with at least one frozen pension grow from 45 to 237. Business Insurance

  7. 2006
    Congress; Richard Thaler and Shlomo Benartzi

    The Pension Protection Act makes automatic 401(k) enrollment the norm, building on their research. Brookings

  8. 2017
    Ted Benna

    Tells the Wall Street Journal he regrets it: the 401(k) was never meant to be the main retirement plan. CS Monitor

The parallel push, on Social Security

  1. 1980
    Peter Ferrara, Cato Institute

    Cato's first book argues for replacing Social Security with private accounts. Harvard Law Today

  2. 1984
    Stuart Butler and Peter Germanis, Heritage Foundation

    “Achieving a ‘Leninist’ Strategy” lays out a long campaign for private accounts. Cato

  3. 2005
    President George W. Bush

    The “ownership society” puts personal accounts at the center of Social Security reform. It stalls. Brookings

The case for the defense

  • A 401(k) moves with you. Workers who change jobs get noticeably smaller pensions, even when both employers have identical plans. Boston College Center for Retirement Research, source 20
  • A pension is only as good as the company behind it. Studebaker is why federal pension insurance exists. Pension Benefit Guaranty Corporation, source 4

Sources

  1. ThinkAdvisor, 9 Milestones in the Rise and Fall of American Pensions
  2. Inland Steel Co. v. NLRB, commentary
  3. Reuther’s Treaty of Detroit
  4. PBGC, Studebaker
  5. PBGC, history
  6. Investment Company Institute, 401(k) retrospective
  7. Gusto, history of the 401(k)
  8. GAO, pension plan reversions (HRD-90-51BR)
  9. Society of Actuaries, pension reversions paper
  10. Kwasha Lipton
  11. Workforce, the cash balance battle
  12. Business Insurance, Fortune 1000 pension freezes accelerate
  13. Brookings, the Pension Protection Act
  14. CS Monitor, why the father of the 401(k) regrets it (2017)
  15. Harvard Law Today, Peter Ferrara
  16. Cato, Social Security (Butler and Germanis)
  17. Brookings, why the 2005 Social Security initiative failed
  18. Department of Labor, Private Pension Plan Bulletin Historical Tables, 1975 to 2022
  19. Boston College CRR, An Update on Private Pensions
  20. Boston College CRR, Job Tenure and Pension Coverage
  21. CS Monitor, companies end pensions to use excess cash (1988)
  22. Workforce, more employers freeze defined benefit plans

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