, Crain News Service
WASHINGTON -- If ever a federal act illustrated the law of unintended consequences, the portion of the Employee Retirement Income Security Act that deals with pensions is it.
ERISA was designed to ensure workers got the pension benefits they had been promised. At the time, this meant protecting defined benefit pensions. Yet, as ERISA approaches its 25th anniversary, defined benefit pension plans are in eclipse. Many observers say that development can be attributed to -- or blamed on -- ERISA and subsequent amendments to the law, as well as Congress' insatiable appetite for new revenue.
Changes, often made in the name of fairness, have made defined benefit plans extremely complicated and expensive to maintain.
"One of the new realities that has jeopardized the strength of DB plans is job mobility. Without portability, DB plans lose substantial value to workers whose careers consist of many short-tenured jobs at many different employers," said Bill Arnone, partner and national director of employee financial education and planning at Ernst & Young LLP in New York.
"The unanswered question is whether ERISA caused the supplanting of defined benefit plans by defined contribution plans, or would that have happened anyway."
Ted Benna, president of the 401(k) Association in Bellefont, Pa., goes so far as to say ERISA "should be viewed as the beginning of the death of traditional defined benefit plans."
While other observers don't go that far, they do agree ERISA's impact on defined benefit plans has not been uniformly benign.
"ERISA has its split personality -- we have the labor side, and we have the tax side. From the tax point of view, we have a situation where not only have we not developed a good overall retirement policy, we've actually discouraged defined benefit plans. Through various parts of the tax code, we've discouraged any type of superior funding of these plans," said Pete McCormick, benefits consultant with Buck Consultants Inc. in Pittsburgh.
According to Dallas Salisbury, president of the Washington-based Employee Benefit Research Institute, there were 33 million participants in 103,000 defined benefit plans in 1974, compared with about 11 million participants in 207,000 defined contribution plans. EBRI's most recent estimates show about 40.7 million participants in 42,000 defined benefit plans, compared with 50 million participants in about 700,000 defined contribution plans.
Mr. Salisbury said the number of defined benefit plans peaked in 1983 at 175,000.
Despite the growth in the number of participants, he noted "Relative to the growth of the labor force, there should have been a lot more."
Ironically, ERISA itself gets generally high marks for achieving the major goals of its framers, according to Mr. Salisbury.
Meeting its goals
ERISA had three primary purposes, he said: securing benefit promises to make sure plans were funded; creating the Pension Benefit Guaranty Corp. to ensure the first objective was met even if some plans weren't adequately funded; and increasing benefit entitlement through greater participation and faster vesting. All of these were achieved, he said.
David Strauss, executive director of the PBGC, agreed, adding: "As we look ahead, we hope many more American workers will have additional pension plans that provide a predictable, secure pension for life. To make this happen, changes are needed. We need to make traditional pensions more attractive, and we are working toward that end."
Karen Ferguson, director of the Pension Rights Center, Washington, said ERISA "has been an extraordinary success" when judged on its own terms.
"Having said that, there are, of course, many shortcomings, but they are really traceable less to the law than to the implementation of the law by the administrative agencies and the courts," Ms. Ferguson said. "First, what we saw in the Reagan administration was an invitation for companies to cut back or cut out pensions, first through reversions. Second is what we call executive-only plans. The third and most important has been the advent of 401(k)s -- do-it-yourself retirement plans -- which have invited companies to drop or to effectively freeze (defined benefit) plans."
'Hidden' objective a failure
Meeting ERISA's primary objectives proved to be both expensive and complex, and it "has had the unintended consequence of freezing the defined benefit pension system and encouraging the massive growth of the defined contribution system," which was not a goal or intention of ERISA, said Mr. Salisbury. He noted ERISA had a fourth objective, "hidden" within the wording spelling out the purpose of the PBGC: to encourage the maintenance and expansion of defined benefit plans.
This goal "has been an utter failure," he said.
"The one area where they've substantially fallen short is in the desire to expand coverage," said Syl Schieber, vice president-research and information at Watson Wyatt Worldwide in Bethesda, Md.
Several observers blame changes to the law for ERISA's shortcomings.
"It has achieved what it set out to achieve. But the law of unintended consequences being what it is, it has also done some damage, although I think the damage is more than partly the result of subsequent amendments. If it had been left as it was when enacted, I think -- and I think everyone else thinks -- it would have been grand," said Frank Cummings, a partner in the Washington office of LeBoeuf Lamb Greene & McRae and a one-time staffer for the late Sen. Jacob Javits, R-N.Y., one of the architects of ERISA.
"The subsequent amendments, which were of populist origin, suffered from an excess of populist zeal," said Mr. Cummings.
Yet Henry Saveth, a consultant with William M. Mercer Inc. in New York, believes the situation has improved during the past three years. "The pendulum has started to swing back," he said.
Watson Wyatt's Mr. Schieber said "the confusion -- if not the competition -- between the revenuers and the regulators" has resulted in the program being somewhat less successful than it might have been.
Commenting on reams of legislation that followed ERISA's enactment, Mr. Cummings said, "Every time you make pensions 'fairer,' you make pensions fewer."
Mr. Saveth said attempts to "wring out every last bit of abuse" make ERISA, in essence, "unenforceable." Lawmakers and others must realize there are "no absolute fixes, just more- or less-successful adjustments," he said.
On the comeback trail
Despite the unintended consequences of ERISA and its subsequent amendments, some observers believe defined benefit plans might be on their way back.
"I'm optimistic about the future. For much of these past 25 years, we faced a situation where the tax policy tail was wagging the retirement policy dog, and so much of the legislative activity was based on how to extract more tax revenue, rather than what was sound retirement policy," said James Klein, president of the Association of Private Pension and Welfare Plans in Washington.
Now, "a fortuitous dual situation," combining federal budget surpluses and baby boomer awareness of the need to save for retirement, presents an opportunity for bipartisan efforts to encourage retirement plans, he said.
Peter Turza, a partner in the Washington office of Gibson, Dunn & Crutcher, said he thinks demographic changes guarantee pension policy will continue to be at the forefront of concern.