Rethinking the Risk of Defined Contribution Plans

Abstract

In response to pension funding failures and concern that abuses in the private pension system were denying benefits to many workers, Congress passed the Employee Retirement Income Security Act of 1974 (ERISA). ERISA has several specific objectives: to ensure that workers receive pension benefits after they satisfy certain minimum requirements, to ensure that sufficient funds are set aside to pay promised pension benefits, to ensure that workers receive adequate information about their employee benefit plans, and to set higher standards of conduct for those managing employee benefits and pension funds. ERISA has been successful in accomplishing many of its goals. Today employees vest earlier, more plans are adequately funded, and plan participants are more knowledgeable about their retirement benefits. Moreover, since the passage of ERISA, increased participation and contribution rates in private pension plans have caused the average income of retired individuals to be comparable to that of the rest of the population.