There’s no shortage of debate about whether the Employee Retirement Income Security Act is meeting the retirement challenges now facing baby boomers and generations to follow. But there’s no debating that the law ushered in some monumental changes, enhancing, if not revolutionizing, the concept of retirement as the country knows it today.
Here are the top 5 changes ERISA has brought us:
1. Pension Benefit Guarantee Corp.
The PBGC gets its share of flak. No one really likes paying those premiums. The transition from defined benefits to defined contribution plans has made PBGC less popular; as the pool of DB sponsors grows smaller, so does the collective dollars available to spread the risk around. That’s meant increased premiums and a pretty aggressive tug-of-war between PBGC and the private sector.
But before ERISA, there was no backstop to private pensions. That meant an employer could offer a plan, defer contributions, and not be responsible for coughing up what was rightfully earned by employees.
According to its most recent numbers, PBGC is currently responsible for providing the pensions of about 1.5 million people who otherwise would have been left holding the bag.
That makes at least 1.5 million fans of ERISA.
Sometimes it’s easy to take a blessing for granted.
Let’s say you worked a job in the private sector, a hard, demanding, bulging-disc type of job. You did it for 25, 30 years until you were physically left with no option but to quit. You decide to take a lower-paying job to keep your family fed, but that’s OK, because you’ve been paying into a pension your whole life, and that will allow you and your family to survive.
So, you go to your boss, tell him your plans, and he comes back from management and says, sorry Charlie, no pension unless you stay until you’re 65.
That’s pretty ruthless by today’s standards, and it was a common occurrence before ERISA established vesting rules for public pensions.
3. Pension funding
Again, a touchy topic with a lot of sponsors. Jim Klein, president of the American Benefits Council, is leery of how funding obligations are set. For one, he questions how accurately a pension’s funding status can be determined when one is considering obligations 20 and 30 years down the road.
Low interest rates mean slack performance for pension funds. That means increased levels of annual contributions. Sponsors don’t like that. Interest rates don’t stay low forever, sponsors say. And no actuary can accurately predict the future of rising rates, which will generate better returns for pension funds.
The funding debate can seem like one of those arguments with no end.
Maybe that’s the blessing in disguise — that there is an argument to have. Before ERISA, funding wasn’t regulated. That may explain why so many plans were in such rough shape before 1974.
4. The 401(k)
ERISA didn’t create the tax-deferred compensation plans that it now regulates. The IRS did that in 1978. But ERISA did have a hand in opening the door.
It mandated a study on using pre-tax deferred compensation to potentially fund a new type of retirement plan, and that influenced the Revenue Act of 1978.
Soon after, the floodgates opened up. The IRS issued its 401(k) regulation in 1981. The Tax Reform Act of 1984 required non-discrimination testing of 401(k) plans. By then, more than 17,000 plans were in existence.
Six years later, more than 97,000 plans were in existence. Today, there are more than 500,000.
High-stakes litigation over defined-contribution plans has become a fixture of the ERISA landscape. The 2008-09 financial crisis added fuel to that fire.
Sponsors are now forced to give serious thought about the inherent fiduciary risk in offering their own company stock in retirement plans. And the question of excessive fees continues to draw the attention of courts around the country, with little evidence of a slowdown any time soon.