Retirement plans now come in many shapes and sizes, but prior to 1875, no retirement plans existed in America. As the country moved to a more urban, industrial demographic, workers needed a way to preserve, protect and enhance their savings for the time when they were no longer working. Over the years, both public- and private-sector retirement plans emerged, and the field is still evolving today.
American Express Retirement Plan
The American Express Corporation created the first private retirement plan in America in 1875, according to the Pension Benefit Guaranty Corporation. This retirement plan was known as a defined benefit plan, a type of pension plan in which employees would receive specified payments upon their retirement from the company. Each year, the company would contribute a certain amount in order to keep the plan "funded," or with enough assets to pay out the promised benefits. Employees were entitled to payments based on a calculation incorporating their length of service and average annual wage. Other companies, including utilities, banks and manufacturing companies, created similar plans soon after American Express implemented its retirement plan.
Social Security Act of 1935
The United States Congress, under President Franklin D. Roosevelt, created the first public retirement plan with the Social Security Act of 1935. Similar to the private pension plan created by the American Express Company, Social Security intended to pay monthly benefits to retired workers based on their length of service and annual average wages. In 1935, the program was funded by a 1 percent tax on both employers and workers on the first $3,000 of an employee's income. According to the Social Security Administration, as of 2010, more than 53 million American workers receive Social Security benefits, averaging $1,006.90 per month.
Employee Retirement Income Security Act (ERISA)
Until 1974, employee pensions were largely unprotected. President Gerald Ford signed the ERISA law into effect and established the Pension Benefit Guaranty Corporation (PBGC), an entity designed to insure the pensions of American workers. The ERISA law also enacted a host of other retirement plan reforms, including the creation of the Individual Retirement Account (IRA), designed to give workers not covered by an employer-sponsored plan an option for retirement savings. ERISA also placed stringent fiduciary responsibilities on pension plan administrators, who are required to keep pension assets separate from general corporate assets and are prohibited from misusing or misappropriating pension funds.
401(k) Plans
The Revenue Act of 1978 ushered in the era of salary-reduction plans, primarily the 401(k) plan. Unlike previous retirement plans, which were strictly defined benefit plans that allowed for only corporate contributions, salary-reduction plans were defined contribution plans, allowing for contributions directly from employees. Plans from major companies such as the Hughes Aircraft Company, Johnson & Johnson, and PepsiCo were in place by January 1982.
Roth IRAs
The Taxpayer Relief Act of 1997 introduced the Roth IRA, which essentially reversed the tax ramifications of the Traditional IRA. Contributions to a Roth IRA were not tax-deductible, but distributions were generally tax-free, as opposed to the tax-deductibility of contributions and taxation of withdrawals found in the Traditional IRA.
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