Forty years ago, President Ford signed the Employee Retirement Income Security Act into law. It's hard to conceive now, but ERISA was crafted by both Democrats and Republicans with support from both business and labor. Since then, it's protected the pensions of tens of millions.
ERISA's most important reforms were understandable: Pension promises had to vest. They had to be funded — and those funds needed to be invested for the benefit of participants, not the employer.
Unfortunately, neither Congress nor the ERISA enforcement agencies stopped there: they added layer upon layer of additional requirements. Some, like spousal protection, were very positive. Most, however, made employers less and less likely to offer lifetime income through pensions. The result is very different from what ERISA's authors intended.
If ERISA is a success, why are people less secure about retirement?
Forty years after ERISA, we don't have more retirement security — we have less. Experts quibble whether this is a “crisis,” but today more people worry about their retirement than their health care. In the late 1970s, only 25% were concerned about their retirement; today it's 61% — and rising. Many fear they can never retire at all.
What's changed? Back then, most people with an employer-provided plan had pensions with lifetime retirement income. Today, most that have plans have savings plans, not traditional pensions. Those plans are smaller and most are paid out as lump sums.
What's also changed is that ERISA and the agencies that enforce it didn't keep up. Most employers were willing to pay something for retirement, but they wanted the ability to cut their costs or share them with employees; instead, private employee contributions to defined benefit plans were denied tax-deferred treatment and time and again funding requirements were tightened and increased. Many employers didn't want to be fiduciaries, held responsible for everything from weak markets to inadequate disclosure; instead, fiduciary requirements on employers were increased.
Inflexibility in the law and its interpretation led many employers to abandon traditional pensions and go straight into 401(k) plans or individual retirement accounts. Their move out of defined benefit pension plans was also a move away from the lifetime retirement income security on which ERISA was founded: when people retire they're on their own.
Lack of ERISA agency flexibility undermined retirement security in other ways. Prior to 1974, many employers were part of multiple employer plans — plans where employers paid, but the primary responsibility was lodged in a central plan. Unfortunately, the Department of Labor disapproved of the very lack of employer liability that made such plans useful; the DOL has for decades used its discretion to impose regulatory requirements that ensure no new multiple employer plans are started.
Wasn't “retirement income security” mentioned somewhere in ERISA?
We stack the deck against lifetime retirement income in other ways: if an employer wants to put an annuity purchase option into a 401(k) plan, the DOL imposes higher fiduciary standards on them for doing so. Is it any wonder most employers stick with mutual funds that pay lump sums? Recently the Department of the Treasury has taken some modest actions to facilitate use of annuities, but the DOL has not and the overall federal posture is decidedly unsupportive.
Even more bizarre is that federal policies now encourage lump sum distributions instead. In a misguided attempt to protect workers' right to a lump sum, federal law and regulation lets employers save 10% to 15%, if employees choose a lump sum option. Because of this lure, plenty of companies are giving workers and pensioners that choice — and hoping they take it. Sadly, neither the Treasury Department nor the DOL has used its regulatory authority to reduce this incentive, or even to warn employees that their employer has a powerful economic interest in their decision.
The time has come to move back to basics.
Retirement is complicated, and the original ERISA legislation was not short. Nonetheless, the original law allowed far more flexibility than is currently allowed after its many amendments and after the thousands of pages of regulations and interpretive guidance that have been issued by the DOL and the Internal Revenue Service. Each time a company plan sponsor or two engaged in questionable behavior, the response was to reduce the flexibility of everyone else: regulating the many instead of enforcement against the few.
If this inflexibility continues, then businesses will continue to avoid traditional ERISA defined benefit plans, the law's protections will become irrelevant, and ERISA will have failed in its basic purpose: lifetime retirement income security. Nonetheless, the same creativity and concern for retirement security that created ERISA could revive it.
Just to pick a few examples:
For 75 million people the easiest way to achieve retirement security is to preserve the defined benefit plans they already have.
A focus should be on multiemployer plans, many of which face looming underfunding. The most urgent task here is for Congress to pass legislation that permits multiemployer plans flexibility to restructure and save themselves. Without reforms this year, pensions covering more than a million people will run out of money. Long before they do, the die will have been cast: employers will withdraw even from healthy plans and the system will collapse. Business and labor have been working with members of Congress from both houses and both parties to develop legislation to avoid this fate. If they fail, other ERISA reforms may become irrelevant.
Many changes don't require legislation — just a return to the initial flexibility within ERISA that has been taken away by the DOL and the Treasury Department. They could apply their considerable knowledge and inherent discretion within the law to encourage multiple employer plans and to allow more flexible use of hybrid defined benefit plans.
There are also many possible improvements to retirement savings plans.
First, we could encourage, rather than discourage, lifetime income options. The DOL could create a safe harbor provision to stop discriminating against annuities and could require, or at least facilitate, lifetime income reporting.
We could also provide better retirement security for millions by facilitating state efforts to develop “secure choice” programs for private-sector employees and include automatic enrollment. Largely because of opposition by and to the DOL, states are avoiding ERISA models, and as a result will provide inferior retirement security. If the DOL used its discretion to help these efforts, rather than oppose them, the result would be secure choice models that provide better retirement security.
There are many more possibilities. Many don't require a change of law, just a willingness to use regulatory discretion to enhance flexibility instead of restricting it. The same creativity that produced ERISA a generation ago can provide retirement security for the generations to come. n
Joshua Gotbaum recently completed four years as the director (CEO) of the Washington-based Pension Benefit Guaranty Corp., which was created by ERISA. He is currently a guest scholar at The Brookings Institution, Washington. His commentary expresses his personal views.