COMMENTARY: Bad decisions hurt pension system

I wince every time another company decides to freeze its pension plan. More than 40% of Fortune 1000 companies sponsoring defined benefit plans have frozen at least one plan, up nearly sixfold since 2004, according to a recent Towers Watson & Co. analysis.

I wouldn't be surprised if more than half of all private sector defined benefit plans are frozen within the next couple of years, resulting in hundreds of thousands of employees no longer earning a secure, predictable employer-provided pension benefit.

I wince because the withering of the defined benefit pension plan system was at least partly avoidable and there is plenty of blame to spread around.

At the top of the list are federal lawmakers, who did plenty to discourage employers from offering the plans. One wrongheaded move goes back many years ago when many plans were hugely overfunded as a result of stellar investment returns and high interest rates.

A fair number of employers purchased annuities from insurers to ensure participants would receive their promised accrued benefits, terminated their plans, then set up new plans and collected the surplus assets from the terminated plans. I see nothing wrong with such a practice as it encouraged employers to generously fund their plans, knowing they would be entitled to the surplus.

Some federal lawmakers saw it differently, viewing it as corporate plundering of pension plans. Unfortunately, their views prevailed and Congress imposed such huge taxes on reversions that it essentially ended the practice and gave employers a disincentive to offer pension plans.

Regulators aren't without blame either. Consider their actions when a new pension plan design—cash balance plans—emerged in the mid-1980s. Those plans spread like wildfire. Employees liked them because the benefits were easy to understand and the plans often provided richer benefits for shorter-service workers than traditional final average pay plans. Employers also liked the plans because their costs were easier to predict than traditional plans and, in some cases, cost less than the plans that they replaced.

But when lawsuits were filed alleging that the basic design of the plans discriminated against older employees, regulators refused to issue guidance to end the age discrimination issue. Finally, Congress passed legislation in 2006 to make clear that the plans were not age discriminatory. But by then, many employers lost their interest in the plans because of the uncertain legal climate.

In all fairness, regardless of what lawmakers and regulators would have done, defined benefit plans would have waned. Many employers, due to issues such as increased life expectancies, want plans with more predictable costs, such as 401(k) plans.

Still, the actions and inactions of legislators and regulators accelerated the demise of defined benefit plans, and one can only hope that greater wisdom prevails in future federal benefit law and rulemaking.