19th Century Genesis

The year was 1875. The American Express Company made business history--it became the first firm to offer major retirement plans to its employees.

Retirement plans at this point were viewed as little more than rewards: a bonus for certain employees that had demonstrated dedicated service for a number of years.

Because of this approach, there were no official, on-paper promises to employees. Therefore, retirement payments, at least in their infancy, had little to no role in recruiting or retaining employees.

Early Growth

By the 1920s, Washington had begun to take notice of retirement plans. As a result of tax law changes in 1921 and again in 1926, retirement plan income could now be deducted as an ordinary business expense. The Depression was settling in, however, and these plans virtually disappeared in corporate America.

That is, until World War II. During and just after the war, the combination of wage and price controls in a limited labor pool made attracting employees very difficult. Businesses discovered that offering retirement plans allowed them to get around the wage and price controls. Moreover, the pension deductions helped businesses reduce excess profits before taxes.

Problems with the Plans

In 1948, when the National Labor Relations Board mandated the inclusion of retirement plans in collective bargaining agreements, the stage was set for the spread of retirement plans to most major unions.

Retirement plans became an expected perk of "big company" jobs by the 1950s; most large employers were now offering them regularly. But the administration wasn't always ideal. Many retirement funds suffered from discriminatory design or were managed poorly.

Laws were passed to improve their design in 1942 and again in 1958, but benefits were commonly denied to many employees because of arcane rules or strict qualification requirements. Other plans ended up underfunded, leaving thousands without benefits when the company went bankrupt.

ERISA in 1974

To curb pension plan abuses, Congress began work in 1967 on a major retirement plan reform bill. The proposed legislation, which finally passed in 1974, is known as the Employee Retirement Income Security Act, or ERISA.

The bulk of this legislation is targeted at retirement plan design, setting standards for fair and equal benefit distribution among plan participants. Ultimately, though, ERISA's influence has ended up extending far beyond retirement plans into other benefits such as health, disability and unemployment.

Since its inception in 1974, ERISA has been modified by virtually every major tax bill Congress has passed. Loopholes in the plans' design have been opened and closed along the way, and the result is a very complex set of requirements we use to regulate retirement plans today.