Guidant Financial Group Blog

True – the Employee Retirement Income Security Act (ERISA) of 1974 was created to move the responsibility of saving for retirement from the employer to the employee; but, when, 35 years later, employers who have promised their employees a pension decide to freeze their defined benefit plans, we wonder whether ERISA did enough to protect the interests of pension participants.

An article by the Associated Press today announced that nearly half of employers with pension plans have frozen these accounts (see About Half of Pension Sponsors Have Frozen Plans). The finding comes from the Government Accountability Office (GOA), which surveyed 471 single-employer defined benefit plan (DBP) sponsors.

The sad reality of these freezes is that most plans will never be unfrozen, leaving employees with stunted pensions. While most employers who freeze plans do put 401(k)s or other defined contribution plans (DCPs) in place, employees who have worked for the same company for several years, expecting a guaranteed pension for their long-term loyalty, will now have to start contributing to a new plan to make up for lost future income.

This transition can be difficult for multiple reasons. First, employees will have to adjust to lost immediate income (a percentage of their paycheck will now have to be contributed to a DCP). Secondly, for long-term employees, they have lost out on several years of compounded interest – leaving them at a decided disadvantage to their younger counterparts who still have several years in which to grow their supplemental accounts.

While ERISA served many great purposes, the question remains as to why congress failed to put guidelines in place that regulate the transition from DBPs to DCPs. Even though ERISA added more savings options for employees and employers, it did not require transition to DCPs nor did it put provisions in place that require the continuation of existing pension plans should they choose to keep their DBPs. Now employees are left holding the proverbial bag.

"When companies freeze plans, older employees often experience huge benefit losses and younger workers are left to save for themselves," Karen Friedman, policy director for the Pension Rights Center, told the Associated Press. "Congress needs to step up to the plate to develop solutions that encourage companies to preserve their employer-paid, guaranteed pension plans, not freeze them."

At least participants in frozen pension plans have options. For those looking to grow their retirement plans quickly in ways that help them feel more secure, the best option may be the acquiring of a self-directed IRA that lets them invest in assets they can control.