There seems to be little to celebrate at the 25th anniversary of the passage of the Employee Retirement Income Security Act. ERISA, which was designed to ensure that corporate pension promises were kept, was the first cut in the death of a thousand cuts as a string of government actions that have crippled, and probably have fatally wounded, the defined benefit pension plan.
At the time of ERISA's passage, defined benefit plans were the major vehicles for pension provision in the United States. No one wanted to kill them, yet that, in effect, is what has happened.
Companies that have done away with their traditional pension plans in favor of 401(k)-type retirement plans, or hybrid cash balance plans, see no going back.
Oakland, Calif.-based Clorox Co. is one of the hundreds of corporations that have retrofitted their traditional pension plans. Nancy Roche, assistant treasurer at Clorox, which converted its $210 million defined benefit plan to a cash balance plan in 1996, doubts the company will revert to a traditional pension plan at any time.
With career employment no longer the norm, and technology redefining jobs, employees, not employers, will be largely responsible for saving for their old age, she said.
"In the past the employer has maintained a relationship with the employee until death. In the future I would not see that continuing. What is more likely is that the relationship between the employer and employee will cease at the end of employment," she said. When workers quit jobs, they will move their 401(k) savings and cash balance account balances to new employers' plans or to individual retirement accounts, she said.
Joseph V. Kulhanek, manager of pension and trust investments at Avon Products Inc., New York, seconds that.
He would be "hard pressed" to think of any circumstances that would prompt Avon, which converted its $600 million traditional pension plan into a cash balance pension plan last summer, to switch back, he said.
"I would be quite confident in saying that 20 years from now the plan we will have is the cash balance plan," he said.
The company revamped its plan because it employs mostly women, who tend to have shorter tenures than men and switch jobs more frequently. The cash balance plan, with its 401(k)-like account balance feature and the ability to cash out at the end of employment, "is a better fit than a traditional pension plan," Mr. Kulhanek noted.
Basking Ridge, N.J.-based AT&T Corp. also sees no going back, said Burke Stimson, a company spokesman. The company, which converted its $20 billion defined benefit plan into a cash balance pension plan not long ago, anticipated that "the cash balance plan, which by nature is portable with a little more risk, would grow in stature in the next century, rather than be diminished," he said.
In fact, many pension experts, including David M. Strauss, executive director of the Pension Benefit Guaranty Corp., see cash balance plans as the last-ditch attempt for resuscitating defined benefit plans. Mr. Strauss has asked that federal laws be updated to allow the melding of defined benefit plans with 401(k) plans.
James A. Klein, president of the Association of Private Pension and Welfare Plans, a Washington-based trade group, called cash balance plans a "creative way of making defined benefit plans more relevant for the 21st century."
In addition, employers seem to have garnered support of lawmakers in trying to rid the law of provisions they say dampen their enthusiasm for setting up and maintaining defined benefit plans.
But many pension experts say those efforts are not likely to extend the life of defined benefit plans by much.
Still, on some levels, ERISA has been highly successful.
It gave significant protections to pension plan participants by requiring employers to observe new standards for coverage, vesting, funding, investment supervision and plan termination insurance.
Statistics confirm that most pension plans are better financed now than they were pre-ERISA, and more workers are eligible to collect pensions now than they were before ERISA became law.
Some 65% of all pension plans have more than enough assets to pay vested benefits, compared with 34% when ERISA was enacted in 1974.
In addition, 70% of participants are fully vested now vs. 39% back then, according to the Department of Labor in Washington.
"With certain fairly narrow exceptions, (ERISA) has performed smashingly well," said Steven J. Sacher, partner in the Washington office of Kilpatrick Stockton LLP.
Yet the percentage of the working population covered by pension plans essentially is unchanged since the enactment of the law. And the number of defined benefit plans continues to nosedive, dropping to less than 70,000 from more than 175,000 in 1983, the record year.
One theory is that ERISA has contributed to the decline of defined benefit pension plans by legitimizing 401(k)s and other defined contribution plans.
Until ERISA, a pension plan was simply an employee benefit plan that provided monthly checks to covered workers. ERISA redefined a pension plan as something that "provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond."
That new definition justified numerous changes that have eroded the popularity of defined benefit plans and shifted much of the responsibility and risk of retirement savings from employers to workers.
That expanded definition also gave employers permission to drop coverage by giving workers one-time payments when they quit, instead of maintaining responsibility for them beyond employment and into retirement. And because most workers tend to spend -- rather than invest -- these lump-sum payments from their employers, the law has contributed to the decline of the idea of retirement income security, generally thought of as a monthly pension check, said Dallas L. Salisbury, president of the Washington-based Employee Benefit Research Institute.
"Changes in the law intended to enhance retirement income have actually served to undermine retirement income and defined benefit plans in that sense," Mr. Salisbury said.
According to the most recent Labor Department statistics, there are about nine times more defined contribution than defined benefit plans.
That's a far cry from the goal of ERISA outlined by Rep. Al Ullman, D-Ore., the senior Democrat on the House Ways and Means Committee, in introducing the final bill in August 1974.
"This legislation provides urgently needed reform in the pension area. But at the same time, it continues the basic governmental policy of encouraging the growth and development of voluntary private pension plans," Mr. Ullman said on Aug. 20, 1974.
But the decimation of traditional pension plans also can be attributed to another 25-year-old law: the Congressional Budget Act of 1974.
Under the budget act, the executive branch must calculate and publish estimates of tax expenditures each year. That, in turn, made pensions -- which receive the biggest tax break in the budget each year -- ripe for the picking among lawmakers looking to reduce the budget deficit.
From the Economic Recovery Act of 1981 to President Clinton's first budget package in 1993, Congress has been nipping at the heels of defined benefit plans. Among other things, lawmakers have limited plan contributions, made it nearly impossible for plan sponsors to withdraw surplus pension assets and imposed surcharges on contributions beyond a specified limit.
The result of such onerous burdens, many experts believe, is that defined benefit plans are too expensive and too cumbersome for many employers to offer.
"ERISA has been the chief culprit for the death of the traditional defined benefit pension system," said Ted Benna, president of The 401(k) Association in Bellefonte, Pa.
The irony is that drafters of ERISA tried to keep costs of the new law in check. "Pension plans cannot be expected to develop if costs are made overly burdensome, particularly for employers who generally foot most of the bill," Mr. Ullman noted in his remarks on introducing the final legislation.
Still, there have been many expenses. For example, ERISA established the Pension Benefit Guaranty Corp. to which plan sponsors pay a per-participant premium that can total hundreds of thousands of dollars each year.
By making employers pay premiums to the PBGC, and by requiring them to abide by a set of complicated standards for funding their pension plans, the law has taken away the flexibility of employers to set up or shut down their plans at will, Mr. Benna said.
"After ERISA, corporate pension plans became hostage to the PBGC . . . so lawyers advised companies not to set up pension plans," he observed.
Several industry observers believe a reduction in the PBGC premiums might help stanch the decline of defined benefit plans. The PBGC's Mr. Strauss dismisses that notion. Nor does he have any plans to ask lawmakers to reduce premiums.
But that's not all.
A 1993 law reducing the amount of salary on which employers can base pensions also contributed to the decline, sources said. In fact, that single amendment to ERISA is credited with a surge in non-tax advantaged pension plans for top executives, prompting many companies to abandon traditional pension plans.
As a result, senior executives at many companies may have permanently lost interest in traditional pension plans, pension experts said.
So what's the solution? Many observers point to a host of "pension reform" provisions in the tax bill recently passed by Congress as part of the answer.
These provisions, in large part, would undo the cutbacks in ERISA in the 1980s and early 1990s. They include: raising compensation limits; allowing workers to put more into retirement plans; eliminating barriers to employer contributions to plans; simplifying the complicated non-discrimination rules; and erasing the excise tax on excess contributions.
Mr. Clinton, however, has vowed to veto the bill.
"Does ERISA need to be updated? Yes. The question is how," said Michael Gordon, a Washington-based pension lawyer who was minority counsel for pensions of the Senate Labor and Public Welfare Committee in the early 1970s.
Mr. Gordon answered his own question by suggesting the creation of a commission, of the type set up by President John Kennedy in the early 1960s, to examine overhauling the law.
