tirement requirements. The concentration of plans and workers covered in two categories-age 40 and 10 years of service, and age 40 and 15 years of service-is attributable to the influence of plans in the automobile and steel industries, respectively. With the necessary adjustments in 28 plans to take account of preparticipation requirements, length-of-service requirements for deferred full vesting ranged from 5 to 25 years (table 3). Approximately 75 percent of the plans specified either 10 or 15 years of service. Only 6 percent of the plans required less than 10 years, while 14 percent required more than 15 years.

Minimum age requirements for deferred full vesting were also stipulated in almost three out of four plans. Age 40 was by far the most common at which the worker with the required service becomes vested. In 24 plans, the minimum was age 50 or over the ages, as discussed later, at which early retirement provisions may apply.

Deferred Graded Vesting. Among the 19 plans providing deferred graded vesting, minimum age and service requirements also varied considerably (table 4). The minimum service necessary before any part of the employer's contribution was vested ranged from 5 to 15 years (including preparticipation service in 7 plans which required plan membership service for deferred graded vesting). Fifteen plans conditioned partial vesting on meeting a requirement of 10 or more years of service. Six of the plans provided that a specified age also must be attained.

The methods of grading also varied widely. Among these 19 plans, the most common types of grading were 25 or 50 percent vesting after minimum service requirements had been fulfilled, with an additional 5 or 10 percent vested for each subsequent year of service. In some plans, service was not the only determinant for additional vesting. For example, in one plan, the worker was 10 percent vested if he had 5 or more years of service at age 45. Additional vesting was on the basis of 10 percent for each year of service after first vesting until age 54. No further vesting was possible after that age.

In 12 of the 19 plans, 20 or more years of service were required before the worker was fully vested. In the remaining plans, the service needed for full benefits ranged from 12 to 18 years.

In this plan, the worker was 10 percent vested at age 45 with 5 or more years of service, plus 10 percent for each additional year of service thereafter until age 54.

In this plan, the worker was 50 percent vested at age 50 with 10 or more years of service, plus 10 percent for each additional year of service thereafter until fully vested.

In this plan, the worker was 50 percent vested at age 52 with 15 or more years of service, plus 5 percent for each year his age was over 52. A worker aged 62 with 15 or more years of service was fully vested.

Almost 9 out of 10 single employer plans contained early retirement provisions, while only a fourth of the multiemployer plans had such provisions. Early retirement was available under almost all contributory plans and about two-thirds of the noncontributory plans.

Early retirement and vesting provisions were most commonly found associated with each other in a plan, with 163 plans, covering about 2.5 million workers, containing both provisions. About one out of four plans in the study did not provide for either early retirement or vesting. More than two-thirds of these were multiemployer plans.

Requirements for Early Retirement

In order to retire early, the worker usually must meet specified age and/or service requirements, as in the case of vesting. On the whole, length-ofservice requirements for early retirement were not

significantly different from those for vesting. Fifteen years of service 10 was the most common specification, and 10 and 20 years were also frequently required. Thirty-six plans required less than 5 years of service and 10 required none-only one plan providing vesting (that with immediate full vesting) fell in this latter group (table 5).

On the other hand, minimum age requirements for early retirement were generally substantially higher than those for vesting, as would be expected. All but 17 plans stipulated age 55 or higher; age 60 was established as the minimum age for early retirement in more than half of the plans.

A requirement not found in vesting provisions was specified in 68 early retirement plans-the worker could retire early only with the consent of, or at the request of, his employer. Provisions of this type were presumably designed to reduce or control early retirement, not to bar it. What such provisions mean in actual practice undoubtedly varies widely among companies, and within the same company at different times; the wording of the pension plans offers no measure of practice in this regard.

10 In plans which specified plan membership requirements in order to retire early, the preparticipation period has been added to plan membership service for purposes of this analysis.

puted for each of the 300 plans studied. All measurable factors, such as minimum age requirements, length-of-service requirements, plan membership requirements, and preparticipation periods, were taken into account. It was assumed that the worker would remain in the same employment for all of his working life. The results (purely hypothetical, it must be emphasized) are presented in the accompanying chart.

The earliest age at which the newly hired 25year-old worker could expect to become fully vested ranged up to 62 years. In 40 percent of the 300 plans, the worker would be fully vested by the time he reached age 45. Before he reached his 60th birthday, the possibility of early retirement would be available to the worker under 32 percent of the plans.

The integration of vesting and early retirement indicated in the chart reveals the prospects which face a 25-year-old worker in eventually realizing the pension credits he is beginning to accumulate. In 24 percent of the plans, he will have to reach normal retirement age, typically 65, in the same employment (or under the coverage of a multiemployer plan) to secure any return. Prior to reaching age 55, he will have become fully vested or will have met the requirements for early retirement in a little more than half of the plans.

Portability Under Multiemployer Plans

Perhaps the ideal method of protecting pension rights of workers who transfer from one employer to any other employer with a pension plan is to allow them to carry their previously earned pension credits, as under the Federal social security program. Problems of great magnitude are posed by such an approach, and proposals along these lines have been thus far confined chiefly to theoretical discussions. Yet a limited portability of pension credits is implicit in multiemployer plans which may provide all the protection most workers under these plans need during their working life.

The scope of multiemployer plans tends to, but need not necessarily, parallel the scope of the collective bargaining agreement. Under such a plan, a number of employers (e.g., an association) under a single agreement with a union, or a number of employers under separate contracts, agree to contribute specified amounts to a pooled central fund.

Interests at Stake in the Investment of Pension Funds

VICTOR L. ANDREWS*

FOR THE 11 million active workers who were members of noninsured corporate pension plans1 at the end of 1958, prospective benefits were secured by over $22 billion of assets held in several thousand trust funds.2 The investment policy of the trustees of these funds is important not only to the employees but also to their employers and the unions which represent them because of the pivotal role investment earnings play in determining benefits and costs. Earnings are also vital to the professional trustee, in view of the high degree of competition for pension trust business. Fund assets and investment of the inflow of new money represent a powerful force in the securities markets. In recent years, the convergence of an inflationary threat and a shift in the legal circumstances of pension investment have moved trust managers to rely increasingly on common stocks. In addition, it has been argued that, irrespective of inflation, common stock returns over the long run are superior to those of other investment media. Nevertheless, corporate bonds have continued to be the greatest single class of securities held by corporate pension trusts; the shift to common stocks has been at the expense of Government securities.

The History of Pension Fund Investment

Before World War II, noninsured pension funds invested predominantly in debt securities (corporate and Government bonds), but corporate stocks constituted a sizable proportion of total assets. During the 1920's and the early 1930's, corporate bonds were 60 percent of assets and

The bond-stock division of assets remained constant during the 1930's, but, with the contraction in corporate bonds outstanding in the pit of the depression and low issuances thereafter, pension funds turned to the rising volume of securities being offered by the Government to finance its deficits. By 1939, corporate bonds had fallen to 55 percent of assets, and U.S. Government securities had risen to 15 percent.

World War II forced a terrific buildup of investment in Government securities. From 1939 to 1945, assets held by pension trusts increased from an estimated $1.0 billion to $2.9 billion. Caught between this increase of resources and a wartime low in the volume of corporate bond issues, pension trusts turned for earning outlets to the warswollen Government debt. By 1945, Government securities had climbed to 45 percent of assets, and corporate bonds had dwindled to 36 percent. Corporate stock had declined to 12 percent of assets.

Between the end of World War II and 1951, the first year for which detailed data are available, part of the distortion produced by wartime investment had been reduced. At the end of 1951, however, Government debt constituted approximately 32 percent of total assets. Corporate bonds were 45 percent of all investments, and common stock was 12 percent-both considerably below the level of the 1920's and 1930's. Preferred stock was almost 4 percent of assets. (See table.)

Since 1951, the outstanding feature of investing policy has been a shift from bonds to stock. Government securities and corporate bonds combined

Assistant Professor of Finance, School of Industrial Management, Massachusetts Institute of Technology.

1 Excludes profit-sharing plans with retirement features and union administered funds covering employees of more than one company, as well as insured plans. The insured plans covered an estimated 5 million workers whose benefits were secured by $14 billion of reserves.

The word "fund" refers throughout this article to the body of assets possessed by a noninsured corporate pension plan, and held in trust to assure payment of benefits.

8 Figures on portfolio distribution for all years before 1951 are from Raymond W. Goldsmith, Financial Intermediaries in the American Economy Since 1900 (Princeton, N.J., Princeton University Press, 1958), table A-10, p. 371.