Quote:
Originally Posted by springfieldva
The reason the 401k came about was because employees were working for 20, 30, 40+ years and earning pensions only to lose them when their companies went belly up. Mr. Fink must have forgotten about that ugly little side to pensions.
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Actually, they were not linked quite that way.
The Employee Retirement Income Security Act of 1974 , called ERISA, came about because of companies being forced into bankruptcy and pension plans being impacted. ERISA requires actuarially fair accounting for pension obligations - so that corporations must fund those obligations.
Interestingly, the original ERISA legislation, as it was being drafted Congress, also would have applied to public sector pensions (state & municipal pensions). Public sector unions rallied to fight against that requirement. Public sector unions didn't want actuarially fair accounting because they knew what the implications would likely be during contract negotiations.
A grossly simplified/exaggerated exchange during union compensation negotiations would be:
- Union negotiator: give us a big raise
- Municipal entity negotiator: we don't have money
- Union negotiator: then give us a smaller current raise, coupled with a large pension increase. Don't worry - you don't have to account for it today and the bill will come due a decade or more from now when you yourself are already retired, and taxpayers in the future will figure out how to pay for it.
If ERISA accounting had been required, the interchange above wouldn't have transpired.
The 401(k) provision was added to the Internal Revenue Code in 1978 as part of the Revenue Act, allowing employees to defer compensation from taxes until retirement. It was not originally intended to become a retirement vehicle.