"I think a combination of rising PBGC premiums, together with what was happening economically with the markets where employers just felt like, 'Oh my gosh, we're taking on all of this responsibility for contributions and for funding the plan when economic times are bad,' and then they had to increase their funding levels even if they weren't able to do so," said Melissa Kahn, managing director of retirement policy for State Street Global Advisors' defined contribution team. "So I think it was the combination of those economic factors and the attractiveness of 401(k) plans as an alternative vehicle where most of the responsibility was put on participants for whatever retirement income they were going to have."
Over the last 50 years, there have been several prominent retirement bills signed into law, starting with the Employee Retirement Income Security Act of 1974. But experts point to the Pension Protection Act in 2006 as a key piece of legislation that wound up solidifying DC plans' prominence and the downward trajectory of pension plans.
Geoff Manville, partner and senior director of government relations at Mercer, said the PPA was transformative for DC plans, and accelerated "an exodus from the private pension system."
The PPA — one of the biggest overhauls to ERISA — sought to get pension plans better funded, and limit the Pension Benefit Guaranty Corp.'s exposure, by prescribing shorter amortization periods, more conservative interest rates for measuring liabilities and higher premiums to the PBGC.
The PBGC was reeling after absorbing nine of the 10 largest pension plan claims
in the five-year period preceding the act’s passage in 2006. The size of those claims sparked concerns about the agency’s solvency as well as about how to protect taxpayers from having to cover its deficits.
The more demanding funding requirements for DB plans established in the PPA, coupled with economic turmoil in 2008 and 2009, led sponsors to ultimately leave the pension space, sources noted.
Plus, while not the main focus of lawmakers crafting the bill, the PPA greatly impacted DC plans.
Specifically, the PPA created the legal framework for automatic enrollment and automatic escalation of contributions. It also created qualified default investment alternatives, or QDIAs, allowing plan sponsors to steer assets toward age- and risk-appropriate choices such as target-date funds when participants do not make their own choices.
Those changes to the DC system used inertia to help workers better save for retirement, Kahn said. “Once somebody gets into a particular plan, they are very likely to stay there and that’s why target-date funds, auto enrollment and auto escalation are so important,” she added.
The PPA and retirement bills that have come before and after it amend ERISA, which made permanent the U.S. employer-based retirement system, said Michael Kreps, principal and chair of Groom Law Group’s retirement services practice, noting that other developed nations have national retirement systems.
“We have one (a retirement system) that grew organically from employers, and by regulating it, Congress set it in stone,” he added. If retirement legislation were a home, “ERISA is basically the foundation upon which everything has been built over time,” Kahn said.
ERISA, which was signed into law on Labor Day in 1974, created a regulatory framework for overseeing corporate pension funds and a government-run program financed by plan sponsor premiums and established the PBGC to cover participants’ benefits in troubled plans. ERISA also introduced the idea of fiduciary responsibility, with pension assets to be invested for the sole benefit of plan participants.
“The law’s basic tenets of fiduciary responsibility … I think it’s been effective at protecting workers’ benefits while also giving plan sponsors and the industry room to innovate and promote more understanding of saving and investing generally,” Manville said.
Over the years, Congress has passed many bills amending parts of ERISA, but in recent memory the spotlight has been dominated by the Setting Every Community up for Retirement Enhancement Act, or SECURE Act, signed into law in 2019, and SECURE 2.0, which was enacted three years later.
Both bills feature dozens of provisions aimed at improving the retirement system and focus mainly on the DC side.
SECURE 1.0, as its now commonly referred to, included provisions that created pooled employer plans, making it easier for smaller employers to join multiple employer plans, increased the automatic-enrollment safe harbor cap to 15% from 10%, and allowed long-term part-time workers to participate in 401(k) plans.
In Congress, work began on SECURE 2.0 before SECURE 1.0 passed. The second bill built on its predecessor and among its more than 90 provisions, expanded automatic enrollment in 401(k) and 403(b) plans, raised the required minimum distribution age and allowed employers to make matching contributions to retirement plans based on qualified student loan payments.
“I think SECURE 1 was really focused on plan sponsors and service providers and making changes to make it a little bit easier for them to maintain and offer plans, and SECURE 2 I think focused a little bit more on participants and participant choice to make it easier for them to save in retirement plans,” said Aliya Robinson, managing legal counsel, legislative and regulatory affairs at T. Rowe Price.
Fred Reish, a partner at Faegre Drinker Biddle & Reath, said in crafting both SECURE packages, Congress established a pattern, “Which I think will continue into the future, and is ‘let’s identify the problems in the current system, look for the weaknesses, the holes, and let’s fix them.’”
While it could be a while before SECURE 3.0 is introduced or considered in Congress, the package is likely to focus on plan coverage issues with gig workers and expanding automatic-enrollment requirements, Reish said.
Added Manville, “I think it’s going to be a little while before we build the new crop of reforms for the next package that might pass. But I think that retirement on the Hill will remain a bipartisan affair and that eventually we’ll get to another bipartisan package. It just takes time.”
One bill that wasn’t bipartisan — the American Rescue Plan Act, which Democrats passed in March 2021 — in part established the Special Financial Assistance Program at the PBGC.
The program is designed to shore up struggling multiemployer pension plans through 2051, and Kreps said it’s the most important retirement legislation since ERISA.
“We were really facing a collapse of a significant portion of the multiemployer system,” he said. “The system was at a place where there were a million-plus people in plans that were basically doomed to fail. They didn’t have an employer base that was capable of meeting the pension obligations. There was nowhere else to go so Congress had to step in.”
As of press time, the PBGC has approved $53.4 billion in SFA to plans that cover about 767,000 workers, retirees and beneficiaries.
In a statement to Pensions & Investments, PBGC Director Gordon Hartogensis said although the retirement landscape and PBGC have changed dramatically since ERISA’s enactment, the agency’s mission to protect pensions is as crucial now as it was then.
“Since 1974, PBGC has provided over $100 billion in benefits to more than 2.5 million people in over 5,000 failed single-employer pension plans,” Hartogensis said. “And with enactment of the American Rescue Plan Act, PBGC’s Special Financial Assistance Program is expected to preserve the pensions of millions of workers and retirees in over 200 financially distressed multiemployer pension plans.”n
