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.”