Retirement savers owe a lot to ERISA. 50 years later, what still needs to be addressed?

When the Employee Retirement Income Security Act of 1974 was signed into law 50 years ago this week, it provided much needed protections for American workers and established trust in the nation’s retirement system, but for the law to more effectively boost retirement security over the next 50 years, sources said lawmakers, regulators and the retirement industry need to continue pushing enhancements.

The law, signed on Labor Day, Sept. 2, 1974, by President Gerald R. Ford, established standards for private-sector pension plans, making it so retirement assets are managed in the best interest of the participant and that workers receive their earned benefits.

“ERISA is the most important law that most people have never heard of,” said Bradford P. Campbell, a partner at law firm Faegre Drinker Biddle & Reath and former assistant secretary of labor for the Employee Benefits Security Administration during President George W. Bush's administration. “ERISA has resulted in a tremendous amount of capital in the hands of ordinary people.”

The 50-year-old law is essentially in the midst of a midlife crisis, said Lisa M. Gomez, who leads the Department of Labor’s Employee Benefits Security Administration as assistant secretary for employee benefits security. Which is why stakeholders from all parts of the retirement ecosystem should take stock and assess what about the law is working and what’s not, she added.

“Where are we missing the mark?” Gomez said. “There are so many people who, regardless of the structure that’s been put in place, do not have access to retirement plans, have access and are not using them, don’t understand their retirement plans, are afraid to even say the word ‘retirement.’”

Added Jason Russell, vice president of retirement at the American Academy of Actuaries, on the retirement system: “We don’t know how this experiment is working out. We don’t know whether the savings that employees are accumulating right now will be enough … to provide a secure and dignified retirement for the average American worker.”

The retirement landscape has changed drastically over the last 50 years with millions more Americans now saving for retirement in workplace defined contribution plans as opposed to defined benefit plans.

In 1974, U.S. private pension assets totaled about $133 billion, according Federal Reserve data, and the modern 401(k) plan didn’t exist. Comparatively, data from the Investment Company Institute shows that U.S. retirement assets as of March 31 totaled $39.9 trillion, including $11.1 trillion in private-sector DC plans and $3.3 trillion in private-sector DB plans.

The reason why more Americans are saving more money for retirement is ERISA, sources agreed.

ERISA created a regulatory framework for overseeing corporate pension funds and established the Pension Benefit Guaranty Corp., a government-run program financed by plan sponsor premiums to cover participants' benefits in troubled plans.

It also established national rules for DB plan sponsors on participation, funding, vesting, reporting, fiduciary duties, financial disclosure, and made clear that pension assets are to be invested for the sole benefit of plan participants.

“Prior to ERISA being enacted, there were so many things that were in the dark for participants and their families when it came to retirement benefits,” Gomez said.

J. Mark Iwry, nonresident senior fellow at the Brookings Institution and visiting scholar at the Wharton School, and formerly senior adviser to the U.S. Treasury secretary for national retirement and health care policy, said the 1974 law created a “much safer, fairer system for private pensions than existed before.”

Broadly, ERISA established trust in the U.S. retirement system, said James A. Klein, president of the American Benefits Council, an employee benefits trade association.

“Because of ERISA and its protections, millions of people have the trust and confidence to give a third party their money,” he said. “And for that matter, employers give a third party the company’s money, trusting that decades from now it’ll be there to provide them that retirement security.”

Klein added, “You wouldn’t give $20 to a stranger and say, ‘I’ll come back in an hour for it,’ but you’ll give tens of thousands of dollars (to a retirement plan fiduciary) with the trust that it’s going to be there for you when you need it decades into the future. It’s a pretty remarkable thing.”

Until 1974, there was little or no protection for pensions. And in 1963, the Studebaker Packard Corp. terminated its employee pension plan, and more than 4,000 auto workers lost some or all of their promised pension plan benefits, according to the PBGC.

Over the last five decades, ERISA has been substantially amended, including this century through legislation like the Pension Protection Act of 2006, the SECURE Act in 2019 and SECURE 2.0 in 2022.

The Pension Protection Act, or PPA, which was crafted when there was concern over the PBCG’s solvency — the agency absorbed nine of the 10 largest pension plan claims in the five-year period preceding the act's passage — established new funding requirements and shorter time frames for DB plans.

But on the defined contribution side, the PPA created the legal framework for automatic enrollment and automatic escalation of contributions.

It also created qualified default investment alternatives, allowing plan sponsors to steer assets toward age- and risk-appropriate choices such as target-date funds when participants do not make their own choices.

The more stringent DB funding requirements, coupled with the Great Recession hitting soon after the PPA went into effect, led many retirement plan sponsors to close and ultimately freeze their pension plans in response, sources said.

That fact and the PPA’s automatic and default provisions supercharged the asset shift to DC plans from DB plans, sources said.

In more recent years, Congress has passed two comprehensive retirement security bills — SECURE and SECURE 2.0 — aimed at bolstering the nation’s retirement system and, notably, providing more access to retirement plans.

One key provision in SECURE 2.0 stipulates that starting in 2025, all new 401(k) and 403(b) plans will be required to automatically enroll new employees in their plan, unless they opt out, at an initial amount between 3% and 10%. The amount will then increase by 1 percentage point annually until it reaches between 10% and 15%.

Iwry said the changes to ERISA have made a positive difference.

“We stepped back from the do-it-yourself 401(k) as the dominant vehicle and have been using behavioral strategies like auto features to guide decisions on enrollment, initial and escalating contribution levels, investing, rollovers and hopefully retirement income — transforming the 401(k) into a more intentionally designed and effective retirement plan,” he said.

But while ERISA has helped more Americans save for retirement, persistent problems with the system remain.

A 2022 report from the Wharton Pension Research Council found that 56.5 million Americans ages 18-64 did not have access to a workplace retirement plan.

Several bills have been introduced in Congress in recent years aimed at closing the coverage gap.

One such bill reintroduced in February would require businesses with 10 or more employees that don't offer a retirement plan to automatically enroll their workers in IRAs or 401(k)-type plans.

Another, reintroduced in October, would give workers without an employer-sponsored retirement plan access to a federal program similar to the $927 billion Thrift Savings Plan, Washington.

There are also now 17 states that have enacted automatic individual retirement account programs for their private-sector workers not already covered, according to the Georgetown Center for Retirement Initiatives.

Iwry, who co-authored the federal auto IRA bill in 2006, said the best way to improve the nation’s retirement system is to expand coverage.

“The first priority is to enact nationwide automatic enrollment in IRAs, building on the state auto IRAs and benefiting many more millions of working families, who will then acquire a lifelong habit of saving,” he said.

Other considerations

Campbell said lawmakers in the next retirement security bill should focus on decumulation out of DC plans.

“I think that’s the next big phase of public policy, looking at how we can make the distribution phase have better outcomes for participants to address longevity risk,” he said.

On the DB side, the American Benefits Council has called on Congress to reduce PBGC premiums to stave off more companies exiting the pension space. “Congress needs to stop allowing increases in PBGC premiums to offset unrelated spending,” Klein said. Congress in recent decades has raised PBGC premiums to generate revenues to offset unrelated spending, which critics often refer to as a "budget gimmick."

It’s not yet known which party will control the White House, Senate and House next year, but sources are optimistic that more changes to ERISA can be made to better help retirement savers over the next 50 years.

“For all the extraordinary partisanship that infects so much of public policy and legislation, for years now retirement policy has largely been extraordinarily bipartisan,” Klein said.