ERISA at 40: Stewards reflect on good, bad

Reflecting back on ERISA's first 40 years, the people who've administered it say there were some hits and some misses.

The Employee Retirement Income Security Act made some great advances in retirement security since its passage in 1974, but missed some opportunities as well, like structuring the Pension Benefit Guaranty Corp. and keeping the focus on fiduciary duty, said past and present Labor Department officials who gathered in Washington to celebrate the law's anniversary.

Phyllis Borzi, the current assistant secretary of labor for the Employee Benefits Security Administration, was among those discussing the tribulations when she welcomed seven former officials from EBSA predecessors — the Pension and Welfare Benefits Administration and the Pension and Welfare Benefits Program, whose tenures stretched back to 1977.

In the miss category, Ms. Borzi put the law's Title IV, which created the PBGC, as “the most amended and least successful.

“It was not ready for prime time. A fundamental question is "what the heck is this supposed to be?' Those fundamental questions were never resolved and still have not been resolved,” Ms. Borzi said.

The PBGC has suffered without a clear sense of its purpose and not knowing whether to be an insurance agency, a pension bureau or some other type of guarantor, Ms. Borzi said.

“It was not properly designed,” said Alan Lebowitz, who retired this year as EBSA's deputy assistant secretary for program operations and was the longest serving official of the unit. “I think the PBGC system eventually is going to get bailed out.”

Leslie Kramerich, who served at both EBSA and the PBGC and is now chief policy officer for the PBGC, said she was worried about the PBGC's financial status and mission as more defined benefit plan sponsors close or consider closing their plans. “Funding relief is going to be huge, and asset-to-liability dynamics are going to be huge,” Ms. Kramerich said.

The PBGC has a long history of deficits. According to the agency's latest exposure report, released in June, the single-employer program is improving, but the guaranty program for multiemployer pension funds is not. The current $24.7 billion single-employer deficit is projected to shrink to $7.6 billion by 2023, and is “highly unlikely” to run out of money in the next decade due to strong market returns, rising interest rates and higher PBGC premiums. But on the multiemployer pension side, severe underfunding problems in several plans are projected to cause the agency's deficit to grow to $49.6 billion by 2023 from $8.3 billion currently, the report said.

Many of ERISA's shortcomings, the officials said, stem from unanticipated changes in how employees save for retirement and a major shift to employee-directed defined contribution plans from employer-sponsored defined benefit plans.

Ten years after ERISA was passed, people debated whether the provision covering prohibited transactions should be revised. Sen. Jacob Javits, R-N.Y., a driving force behind the passage of ERISA and author of the first draft, resisted any change, calling such transactions “a very great evil,” said Robert Monks, who ran the unit during the Reagan administration. “Javits was clear there was a fiduciary requirement,” Mr. Monks said.

Several people responsible for enforcing ERISA over the years called for strengthening the law's original intent by reinforcing fiduciary standards for plan sponsors and trustees. “You guys have to develop a prudence regulation,” said Ian Lanoff, a principal with ERISA law firm Groom Law Group in Washington who was the first administrator of EBSA's predecessor after passage of ERISA, before the office had its own agency-level status. Mr. Lanoff said he was lucky that he started when ERISA was new because “people were afraid of it.”

“You need to expand the fiduciary standards,” said Richard McGahey, who held the position in 1999. “They aren't strong enough and they are not broad enough. There is this constant struggle to get the fiduciary standard in there,” Mr. McGahey said.

One area of progress in this area has been EBSA's enforcement program, Mr. Lebowitz said. “People are now held accountable for what they do as fiduciaries.”

Mr. Lebowitz said the biggest flaw in ERISA is the provision related to plan audits that allows sponsors to limit the scope of the audit. ”I think it's devalued the comparability and the efficacy of having an audit,” he said.

Several other former officials pointed to the dramatic changes enabled by Section 404(c), which gives plan sponsors and other fiduciaries liability protections on participant-directed retirement plans, which have proliferated in recent years as defined benefit plans dwindled. “It's become pivotal to everything that's going on now,” said Jeffrey Clayton, who ran the agency from 1981 to 1983. Mr. Clayton said he was “shocked” by how much money is in individual retirement accounts, which are far less regulated.

Mr. Clayton praised Section 406 for prohibiting certain transactions between employee benefit plans and parties in interest such as service providers. “I can't imagine what would happen without 406. It seemed like a fairly simple concept.”

A major improvement in recent years has been automation of reporting by ERISA plan sponsors. That took a lot of time and resulted in a high error rate. “EFAST is the greatest metaphor for change,” Mr. Lebowitz said. “It changed everything, particularly about fees. Plan sponsors can see exactly what they are spending. It's driving down costs.”

Not having the reporting and disclosure requirements of ERISA apply to state and local governments also was a mistake, former officials said, particularly as many public plans and taxpayers face serious underfunding demands.

“Notwithstanding all the wisdom and effort (in administering ERISA), now more people than ever bear all the risk,” Mr. Monks said. “All the money goes to service providers. It simply requires someone to take a Javits-like stand.”

Labor Secretary Thomas Perez, who welcomed the group to the ERISA gathering, challenged them to think about ways to create incentives for retirement savings, including defined benefit plans. “I hope we will spend just as much time on where we need to go,” Mr. Perez said.