Pensions would seem to be a thing of the past. You may hear an older person talk about getting their pension, but it’s not anything almost anyone these days can access. They used to be fairly commonplace, however, so what changed? Why do companies not offer their workers a pension anymore?
A Brief History of Pensions
A pension is a type of retirement fund that you contribute to throughout the course of your employment (much like today’s retirement plans). When you retire, you begin receiving monthly payments.
The first formal pensions were offered by the American Express Company in 1875. Companies in other industries followed suit soon after. This continued until 1978 when Congress approved the Revenue Act of 1978 which allowed for 401(k) plans. From that point forward, pensions became less common.
What Replaced Pensions
Companies were growing tired of the expenses involved with offering pensions. 401(k) plans were seen as a more affordable way to offer a similar benefit while also removing much of the burden of responsibility from businesses and shifting it to the employees. Today, 401(k) accounts are among the most common retirement plans.
Rather than pooling all plan assets together, 401(k) plans feature an account for each employee. Upon retirement, the employee is paid from the funds in the account. 401(k) accounts are funded primarily by employee contributions, though some employers make contributions based on employee contributions.
Why Pensions Are Less Common
There is some overlap between 401(k) plans and pensions, enough that they might seem essentially the same from an outside perspective. From a business’s perspective, however, pensions are not the fiscally smart way to go. Employers must ensure that their pension plans are adequately funded so their former employees have the income they were promised. While the hope is that the interest generated by the contributions takes care of that, that isn’t always how it goes. If the pension plan isn’t performing as expected, the employer has to put more of their own money into the plan. That expense and level of risk aren’t things most companies want to take on, which is why most aren’t willing to offer them anymore. It all comes down to cost.
Pensions were once a common way to fund your retirement, a reward for your loyalty to a single company throughout the years. Most companies don’t offer pensions anymore, however. If you’re one of the many businesses that fall into this category, don’t leave your employees without any retirement benefits. Look into different options for retirement plans so you can still enjoy the benefits of incentivizing employee loyalty.
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