Final answer:
Amending a defined-benefit plan to credit employees for past service increases their retirement benefits but can also lead to underfunding of the plan. The PBGC offers insurance to protect workers' pensions in the event of a company's bankruptcy. There is a shift towards 401(k)s and 403(b)s, which offer portability and protection from inflation.
Step-by-step explanation:
When a defined-benefit plan is amended to credit employees for years of service prior to the date of the amendment, several outcomes may occur. Firstly, the employees benefit as they receive additional pension credits for their past service, which can significantly increase their retirement benefits. However, this action could potentially result in the pension plan being underfunded, as the company now has an increased liability for the past service credited.
In response to such situations, legislation penalizes firms for underfunding their pension plans. Additionally, the Pension Benefit Guaranty Corporation (PBGC) provides a safety net by offering pension insurance to ensure workers still receive some benefits if their company cannot pay what was promised due to bankruptcy. While these safeguards are important, there is a shift from defined-benefit plans to defined contribution plans such as 401(k)s and 403(b)s, reducing the prevalence of traditional pension plans and their associated risks. Defined contribution plans differ in that they do not promise a certain benefit upon retirement but are based on contributions made by both employer and employee and the investment's performance. With these plans being portable, individuals do not lose their retirement savings when changing employers and are not as affected by inflation as with traditional pensions, hence offering a different kind of financial security during retirement.