Earnings and Benefits

In 2005, 50% of employees in private industry were accruing retirement benefits of at least one type, either through a defined-benefit plan (21%) or a defined-contribution plan (42%; the percent of employees participating in retirement benefit plans is less than the sum of the individual plans because some employees participated in both).

The U.S. Chamber of Commerce study of benefits noted that 91% of the 609 companies that participated in the survey offered some form of retirement and savings plan to their employees during 2003. Among companies employing fewer than 100 people, 68% offered a 401K or similar plan, as compared with 100% of companies employing 1,000 or more people.

With regard to savings and thrift plans, such as the 401K, employee contributions are made with pretax dollars. This means the employee's taxable income is reduced by the amount of the contribution. However, taxes are deferred, not eliminated. When the employee starts withdrawing funds from the plan, taxes must be paid on the pretax contributions, any employer-matching funds, and any earnings on these contributions.

All savings and thrift plans require a basic employee contribution, which may be matched by the employer. However, not all employers make matching contributions. Many plans allow an additional contribution by the employee in excess of the maximum amount matched by the employer. This is called a voluntary employee contribution.

Employee savings, thrift, and retirement benefit plans are expected to come under closer public and government scrutiny in the wake of individual and corporate losses caused by stock market fluctuations in the early 2000s. During the strong market years of the mid- to late 1990s, some industry leaders and politicians believed that even government-mandated programs such as Social Security should rely more heavily on private-market investment at the discretion of the individual worker. As the stock market dropped in value at the start of the decade, particularly following the terrorist attacks in New York City and Washington, D.C., in September 2001, opponents of privatizing Social Security argued that individual workers should not have to shoulder increased risk in the investment of their own Social Security funds.

Laws related to employee retirement plans changed following the 2001 accounting scandal and subsequent bankruptcy of Enron Corporation, which left employee 401K accounts ravaged. Many Enron employees, with management's encouragement, had heavily invested their retirement savings in their own company. A large number of current and former Enron employees lost their entire retirement savings when the company collapsed. In the aftermath of the Enron scandal, Congress began to discuss restricting the percentage of an employee's 401K that can be invested in the employee's own company. In March 2006 Congress was working to resolve differences in House and Senate versions of the Pension Protection Act, which legislators hoped would make employer retirement savings plans less vulnerable. The legislation included provisions addressing employee retirement income security, the tax ramifications of savings plans, benefit accrual standards, and health care affordability.