Friday, August 22, 2014

Happy Anniversary, ERISA!

Because summer is a popular time for weddings, it’s also a time of many anniversaries.  2014 marks an important anniversary that is unrelated to marriage but most certainly marks an important commitment to fidelity.  2014 is the 40 anniversary of the Employee Retirement Income Security Act of 1974, or ERISA as it has come to be known. ERISA is the statutory foundation for the regulation and rules that retirement plans must follow to qualify for the tax benefits employers receive when they offer qualified retirement plans to their employees. 

Given the amount of criticism that has been directed at the private sector retirement system recently, some might ask whether ERISA’s 40th anniversary is something to celebrate.  We can certainly find imperfections.  But when we judge something as complex as this body of law, we should view it not with the eye of a perfectionist, but the eye of a realist.  That’s not much different than having a reasonable perspective on interpersonal relationships.  If we’re looking for perfection we are likely to be disappointed.

Very few who are working in the retirement industry today were “in the business” in 1974, the year of ERISA’s enactment.  But an objective look at the state of retirement plans before that time leads to the inescapable conclusion that things have changed for the better.  There may be shortcomings in the implementation and operation of plans under the ERISA umbrella.  But these shortcomings generally have little to do with the intent of its provisions. 

Human weakness and error, intentional or inadvertent, can lead to such failings as unsatisfactory investment choices, inappropriate fees, conflicted investment advice, fiduciary abuses like diverting retirement assets for other business purposes; even such outright crimes as embezzlement.  But such miscarriages of ethics or justice should not unfairly taint the concept of ERISA retirement plans.  There will always be vultures, scavengers and scalawags looking for opportunities to enrich themselves at others’ expense.  That’s not the fault of ERISA. In fact, ERISA is the safeguard to prevent or address these failings.  And, at least in my opinion, ERISA has addressed these pretty well.

Some bemoan the fact that we do not have in place a national retirement program that ensures lifetime benefits to all American workers, benefits like those available to the fortunate minority with defined benefit plans.  As desirable as that might be, in the private sector there are competitive economic forces that play a huge role in determining what benefits an employer can provide to employees and still remain solvent.  And taxpayer funding of such a national program and the accompanying “mandate” is certainly not politically viable at this time.

ERISA has, without question, improved the retirement security prospects of American workers.  Prior to ERISA it was not unusual for profit sharing plans to require 10 or 15 years to reach full vesting, or for defined benefit plan vesting to be reached only at normal retirement age, or upon plan termination.  There were no controlled group rules to prevent abusive business structures that favored the delivery of retirement benefits to a limited group of owners or employees at the expense of others.

There also was no insurance program like today’s Pension Benefit Guarantee Corporation (PBGC) for defined benefit plan.  An example of the consequences of this was the 1963 closure of the Studebaker automobile plant in Indiana.  Its underfunded pension plan left thousands of workers with little, if any, retirement benefits.  There was also no EBSA to ensure that defined contribution plan fiduciaries met their responsibilities of fairness to rank and file employees. 

It was more than a decade – and numerous committees, commissions, surveys and reports later – when Congress finally acted.  Some believe that ERISA legislation only got the support needed for enactment when private businesses became fearful that the states would act individually, creating a patchwork of dissimilar rules that would have made compliance difficult.  Whether such support was motivated by generosity or self-interest, the result – ERISA – was a greater degree of predictability and equity than had existed before.

U.S. retirement plans are at a crossroads.  They are considered a federal budget luxury by some who are more concerned about their perceived impact on tax revenues than they are concerned about our citizens’ retirement security.  Conversely, they are considered by others to be not generous enough, and to provide insufficient guarantees of a dignified retirement. 

Those in the middle of this political and policymaking tug-of-war are most apt to appreciate today’s ERISA-governed retirement plans for the giant positive stride in employee benefits that they represent.   There is more work to be done to lead more Americans to a secure retirement.  But ERISA is the path that has taken us a long, long way toward a highly desirable destination.