The landmark legislation that promised security in retirement has fallen far short of its expectations
updated with correction
The celebration of ERISA's 40th anniversary on Sept. 2 will be a muted affair.
That's because while the Employee Retirement Income Security Act of 1974 benefited millions of people, it did not live up to the “retirement income security” part of its name. Along with praise for what ERISA did accomplish, there are now calls for fixing what it did not.
In 1974, U.S. private pension assets totaled $150 billion, according to Pensions & Investments data. In 2014, according to the Federal Reserve, the $3 trillion in corporate defined benefit plans was dwarfed by $5 trillion in corporate defined contribution plans, which do not provide the same level of retirement security.
President Gerald R. Ford's signing of ERISA on Labor Day in 1974 created a regulatory framework for overseeing corporate pension funds and a government-run program financed by plan sponsor premiums, the Pension Benefit Guaranty Corp., to cover participants' benefits in troubled plans. It also introduced the idea of fiduciary responsibility, with pension assets to be invested for the sole benefit of plan participants.
The 1974 law laid the ground rules for defined benefit plan sponsors on participation, funding, vesting, reporting, fiduciary duties and financial disclosure. Later, Congress was persuaded to amend it several times to prevent potential abuses or address sponsors' concerns.
Got it right
“In terms of what it set out to do, it did remarkably well,” said Karen Ferguson, director of the Pension Rights Center, an advocacy group in Washington. “And it paved the way for very important reforms later.”
One important provision in the original law, said Scott Macey, president and CEO of The ERISA Industry Committee in Washington, was spelling out that ERISA pre-empted all state laws, “which allowed national employers to look to one regulatory authority instead of a multiplicity of them.” While he calls it ”an imperfect statute” for the burdens it imposed on sponsors, “I think the benefits world is probably a better world now than it was before.”
Lynn Dudley, senior vice president of global retirement and compensation policy for the American Benefits Council, Washington, credits ERISA for allowing for more growth in retirement plan coverage. “It was written in a way that was very flexible. It allowed the DC system to evolve. Not that it's perfect, but the fact that it can evolve means that it can respond to the marketplace (and) to participants' needs.”
“It's important to recognize what ERISA has accomplished,” said J. Mark Iwry, senior adviser to the secretary of the Treasury and deputy assistant secretary for retirement and health policy. “In our retirement plan system, we have accumulated the largest pool of investment capital in the world and we've augmented retirement benefits for tens of millions of American families. That's a success story.”
But not completely
The evolution of retirement plans that ERISA's authors could not have foretold has meant complexity that increasingly invites legal challenges, “which drives people away from the (employer-sponsored) system,” said David Levine, an ERISA lawyer with Groom Law Group in Washington.
“As the dollars involved in these plans grow larger and larger every year, there's going to be more and more litigation,” he said.
“The real problem (with ERISA today), is what the courts have done,” said Drexel University law professor Norman Stein. “Any question that wasn't specifically addressed by ERISA, the courts have gotten. The basic fiduciary rules are "be prudent, be good to your employees.' So you have these fuzzy standards, rather than clear rules. The vesting rules are clear; the fiduciary standard is not.”
At its inception, “nobody was really worried about whether you were going to kill the goose that lays the golden eggs,” said Frank Cummings, who was chief of staff to the author of an ERISA first draft, Sen. Jacob Javits, R-N.Y. As a lawyer, his first case was the Studebaker Packard Corp. bankruptcy, where the prospect of thousands of workers losing their promised pensions sparked the idea behind ERISA.
“It was a consumer protection act, that's all it was there for,” Mr. Cummings said.
After all the amendments and regulations were added on, what went wrong “was that a lot of companies stopped making the promise,” said former PBGC Director Joshua Gotbaum.
“Employers are saying, "We are willing to be conduits, but we are not willing to be fiduciaries,' so we need to recognize that if we want employers to facilitate retirement income security,” said Mr. Gotbaum.
Another “fundamental disconnect” Mr. Gotbaum sees in ERISA is the funding mechanism that keeps the PBGC underfunded — particularly on the multiemployer plan side, while raising premiums on the single-employer corporate sponsor side to the point where “it is actually convincing employers to not offer pension plans.”
Employers also got tired of waiting for legislative updates or regulations that would allow for innovations like cash balance plans, said Mr. Macey of ERIC. “What's happened in the meantime is that a lot of companies that would have considered continuing a DB plan in another mode dropped them altogether,” he said.
Legislative updates like the Pension Protection Act of 2006 went into effect too suddenly, said Mr. Cummings. “If you've got to make changes, you've got to make them very slowly. You can't keep getting these big numbers and changing them. It isn't the cost (of maintaining a DB plan), it's the (cost) fluctuation that destroyed the system. The magic word today is derisking, which is another way of saying, "You can't keep bringing big costs on a corporation.'” (The PPA — one of the biggest overhauls to ERISA — sought to get plans better funded, and limit the PBGC's exposure, by prescribing shorter amortization periods and more conservative interest rates for measuring liabilities.)
Ms. Ferguson of the Pension Rights Center blames the regulatory interpretations in 1981 that made it easier to adopt 401(k) plans for allowing “all the good things that happened in ERISA to shift to do-it-yourself retirement.”
Mr. Iwry of the Treasury Department worries about the shift, over time, to lump sums. “When ERISA was enacted, a pension generally meant an employer-funded lifetime benefit,” he said. “Since then, we've seen a major shift to lump-sum payouts in both defined benefit and defined contribution plans.”
Calls for change
“For employees who are covered by employer plans, we need to encourage more adequate savings and improve the plan design and operation,” said Mr. Iwry
Participant advocates like PRC are hoping that Phyllis Borzi, assistant secretary for the Employee Benefits Security Administration at the Department of Labor, will succeed in her push to clarify ERISA's fiduciary standard in order to reduce potential conflicts of interest in defined contribution plans.
Employers would like the flexibility to help educate plan participants more, said Ms. Dudley of the American Benefits Council. “As technology becomes more available, you should be able to incorporate it into your communication with less difficulty, at least on a good-faith basis,” she said.
Modernization in plan design, investments, notification requirements and participant education “is a big issue” that needs further clarification to allay employers' fears, agreed Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce in Washington. “The first thing that comes up when talking about change is the potential for liability,” she said.
Many people would like also to revisit ERISA's theme of retirement income security, arguing that defined contribution plans are not filling the gap left by the shrinking number of defined benefit plans.
“I think the idea of having a good retirement system has sort of gotten lost,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “A lot of smart people put a lot of work into (ERISA), but its relevance has faded.”
Said Diane Oakley, executive director of the National Institute on Retirement Security, Washington: “We really haven't moved any further toward making sure every American can retire.”
Added Dallas Salisbury, president and CEO of the Employee Benefit Research Institute in Washington: “One of the main points of ERISA that one can love or hate is that this system would be voluntary.”
Replacing it with a mandated system “continues to be the central recommendation,” particularly as more attention is paid to how other nations address retirement security. “If you don't have a tax-favored, compulsory system, you are going to look terrible,” Mr. Salisbury said.
Despite all the gloom and doom, said Mr. Gotbaum, “it's not that it is hopeless ... (but) some of the things of the past need to be changed.”
This article originally appeared in the September 1, 2014 print issue as, "ERISA at 40".