Industry Leaders Share Thoughts About ERISA

But, the retirement plan industry looked very different 40 years ago when the Employee Retirement Income Security Act (ERISA) was implemented, and as the industry has changed, the law and its standards have had to change as well.

In anticipation of the 40th anniversary of ERISA, we asked our readers to share their thoughts about ERISA and what change over the past 40 years has had the biggest impact on plan participants (see “SURVEY SAYS: 40 Years of ERISA”). The change to ERISA during the past 40 years that received the greatest percentage of votes from respondents for being the one that most helped participant outcomes was the establishment of Section 401(k) qualified deferred compensation plans, at 44.7%. This was followed by the sanctioning of automatic enrollment subject to certain requirements in the Pension Protection Act (PPA) of 2006, at 21.3%. 

In comments, many responding readers questioned whether the shift in the retirement landscape to employee retirement savings being mostly in defined contribution (DC) plans still matches ERISA’s intent to protect workers retirement savings.

We wondered how those who have influenced the industry—through their work within the government, as an advocate or as a long-time provider to retirement plans—would answer the same questions. On the pages that follow, several influential industry leaders share their thoughts.

Olena Berg-Lacy, a director on the Financial Engines Board since July 1998, from Albuquerque, New Mexico, and former Assistant Secretary of Labor for the Department of Labor’s Employee Benefits Security Administration (EBSA) (1993 to 1998)

Which change to ERISA during the past 40 years do you think has MOST helped participant retirement savings outcomes?

The first is not so much a change as a clarification made in the 90s, regulators made it clear it was perfectly permissible under ERISA to give participants both education and advice. This gave people more tools they need to make good decisions. But, some still do not take the opportunity to save, so the PPA auto-enrollment and auto-escalation provisions were important.

What changes/amendments to ERISA could be made to improve participant retirement savings outcomes?

The major issue that needs to be addressed is the leakage of retirement assets out of ERISA protection in the form of rollovers. Individuals and couples may have assets in a defined benefit pension, defined contribution plan and individual retirement accounts (IRAs). We need to help people consolidate their retirement assets. The new fiduciary rule would be a step in the right direction.

Please share comments about the 40th anniversary of ERISA.

The fiduciary standard—that anyone involved with retirement plans has to act for the sole benefit of participants—for 40 years has served us well, and it will continue to do so.

Ann Combs, principal and head of Vanguard Government Relations in Valley Forge, Pennsylvania, and former Assistant Secretary of Labor for the Department of Labor’s Employee Benefits Security Administration (EBSA) (2001 to 2006)

Which change to ERISA during the past 40 years do you think has MOST helped participant retirement savings outcomes?

There have been a number of important improvements, but I'd have to say the Pension Protection Act provisions that encourage automatic enrollment and automatic escalation of participant contributions along with qualified defaults were a real milestone. They applied the principles of behavioral finance and turned inertia into a benefit for participants. Workers are automatically signed up, often at a younger age than would be the case if they had to do it themselves, thus giving them the gift of compound interest. Their contributions rates increase as their salaries grow, making saving less painful. And default investments, particularly target-date funds, bring professional asset management to 401(k)s, greatly improving outcomes for most participants. These are great developments.

What changes/amendments to ERISA could be made to improve participant retirement savings outcomes?

Coverage is still the big challenge. I think recent developments have greatly benefited those who have plans, and improved their outcomes. But, too many people still don't have the advantage of workplace savings. I'd like to see efforts to deal with the barriers to private-sector multiple employer plans. I think that if small businesses could band together and take advantage of economies of scale, we would expand coverage. We know there's a desire for lower-cost and less burdensome administrative options among small businesses.

Please share comments about the 40th anniversary of ERISA.

I think ERISA has improved the lives of millions of Americans yet it is not well known nor well understood.   Think about it … prior to ERISA there were no vesting standards, no funding standards, no fiduciary standards. Today, trillions of dollars have been set aside, in trust, for retirement security.  Challenges remain but America's workers, retirees and their families can plan for and enjoy a more secure retirement because of ERISA.

Joshua Gotbaum, director of the Pension Benefit Guaranty Corporation (PBGC) in Washington, D.C.

Which change to ERISA during the past 40 years do you think has MOST helped participant retirement savings outcomes?  

Auto-enrollment and default investments have done the most to improve participant savings in employer-sponsored defined contribution plans. It’s worth noting that these are adaptions of defined benefit plan practices to a defined contribution C model.

What changes/amendments to ERISA could be made to improve participant retirement savings outcomes?

One is to expand coverage of retirement savings programs by universal auto-enrollment and auto-escalation with an opt out. The second is to recognize that the goal of ERISA isn’t “savings”—it’s income security. To implement that goal, a portion of defined contribution plans should be required to be invested in a deferred lifetime income product. Failing that, at a minimum we should stop discriminating in favor of lump sums and against lifetime income.

Please share comments about the 40th anniversary of ERISA.

Compared to 40 years ago, the need for retirement income security today is greater, but retirement security has deteriorated. Some advocates appear to have given up, but there is much that can be done—changes that provide the flexibility that employers and employees need to have retirements they can afford. It will take commitment, compassion, and compromise, but the same creativity that produced ERISA a generation ago can provide retirement security for the generations to come.

Scott J. Macey, president and CEO of the ERISA Industry Committee (ERIC) in Washington, D.C.

Which change to ERISA during the past 40 years do you think has MOST helped participant retirement savings outcomes?

Probably the 401(k) provisions. Although the authorization and expansion of 401(k) plans has contributed to the decrease in defined benefit plans, 401(k) plans have also expanded coverage to many workers who did not have access to plans in the past. Additionally, more recent changes to ERISA that have provided for automatic enrollment, auto contribution escalation and default investments have made it easier for sponsors to expand coverage and savings, and for workers to participate. The fee disclosure rules have added greater transparency of costs and expenses to this mix. 

What changes/amendments to ERISA could be made to improve participant retirement savings outcomes?

Simplification of non-discrimination and other rules that would encourage more small and medium-sized employers to adopt plans. Defined benefit plan participant security could likely be increased by allowing some reversion of excess assets while still targeting abusive transactions and situations. Failure to provide for efficient return of surplus assets discourages sponsors from making additional contributions in good business and financial times.

Please share comments about the 40th anniversary of ERISA.

ERISA was a landmark law that established a meaningful framework within which employers can design, operate and communicate plans. ERISA has resulted in enhanced security for workers covered by plans, but has not fully delivered in promoting and expanding retirement plan coverage to the millions of private sector workers who don’t have access to a retirement plan. Although there is much about ERISA that could be improved or simplified, its overall impact on the country and its workers has been positive.

Robert L. Reynolds, president and Chief Executive Officer at Great-West Financial in Greenwood Village, Colorado

Which change to ERISA during the past 40 years do you think has MOST helped participant retirement savings outcomes?

The changes made under the Pension Protection Act of 2006 (and related Department of Labor and Internal Revenue Service guidance) have dramatically improved potential outcomes for all defined contribution plan savers. For example, the PPA substantially increased the use of automatic contribution arrangements in 401(k) plans by providing new legal safe harbor protection for plan sponsors who “go automatic” in their plan designs. PPA also offered protection against fiduciary risk for sponsors who chose qualified default investments, like lifecycle funds, which are far superior to low-return options over the long term. Plus, it made permanent the catch-up contributions and Roth 401(k) arrangements that were established under prior law but scheduled to end. All of these very positive changes mean to me that the PPA made a qualitative impact on defined contribution savings—and took us far to realizing the system’s ultimate potential. It is certainly a great base to build on.

What changes/amendments to ERISA could be made to improve participant retirement savings outcomes?

A major issue that could be addressed through changes to ERISA rules would be to reduce the significant costs and administrative and legal hurdles that discourage so many small businesses from offering a workplace savings plan. Although simplified plan options exist for small employers such as SIMPLE plans and IRA arrangements, they don’t provide the same benefits and savings opportunities as 401(k) plans. The creation of new 401(k) safe harbor arrangements for small employers that simplify administration and reduce risk without increasing cost would encourage greater adoption of 401(k) plans by small employers. Several individual states are considering legislation to address the coverage issue. But, I believe it would be best solved at the federal level through changes to ERISA.

Please share comments about the 40th anniversary of ERISA.

ERISA grew from the need to protect employees’ retirement savings, which it has done since 1974. The success of ERISA and the continued dedication to its purpose 40 years later is evident in the robust advocacy and discussion among employers, employees, regulators and service providers that contributes to the ongoing evolution of our workplace savings systems.

So while ERISA has been a partial success, we have much more to do to flesh out a fully-robust workplace savings structure in America. We need to do more to encourage the adoption of fully “automatic” plan design, adopt a new "norm" of 10%-plus for savings rates, and do more to protect plan sponsors from legal and fiduciary risks so we can encourage more of them to offer their workers access to on-the-job savings. And this, by the way, would help spur capital formation and economic growth generally.

Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI) in Washington, D.C.  

Which change to ERISA during the past 40 years do you think has MOST helped participant retirement savings outcomes?

The most significant changes to ERISA that served to dramatically increase the number of vested participants who would leave plans with some actual economic value; with portability, facilitating career-long savings growth related to income growth, investment returns, and life stages; and life events flexibility in retirement savings accumulation for ultimate meaningful account balances for the greatest number of individuals, was the addition in 1978 of sections 125 and 401(k). [This was] complimented by amendments in 1986 to shorten vesting to five years and end ten year forward averaging and cap gains treatment on many lump sums, as well as the PPA 2006 automatic features provisions.

What changes/amendments to ERISA could be made to improve participant retirement savings outcomes?

While we now have the actual data and research to allow a fact-based answer to question number one, it is not possible to answer question number two. The EBRI mission is to do data-based evaluation of the past, and if we look at the future, we look at multiple scenarios, and seldom does a change only have positive outcomes. Why not make recommendations? Because we do not know what the behavioral impact of changes would be on decisions by either plan sponsors or workers or regulators, thus we cannot know outcomes.

Please share comments about the 40th anniversary of ERISA.

ERISA had a primary stated purpose of increasing the number of plan sponsors, the number of plan participants, and the number of plan participants that would actually get benefits by becoming vested.   What we know as facts are that there are over 700,000 plans today as compared to 300,000 when ERISA was enacted; that the proportion of workers that are active participants has increased from under 40 million to over 85 million—about the same proportion of workers in the workforce as it was in 1975; that the proportion of participants gaining vested benefits has more than doubled as vesting periods have grown shorter.   

We know that total plan assets, average plan assets by various demographics, and the proportion of those over 65 with income and/or accumulated wealth that is attributable to their prior vested participation in ERISA plans has grown every year, and continues to grow according to data from the IRS, the Federal Reserve, the Department of Commerce Income and Product Accounts, the Department of Commerce Bureau of the Census, and administrative data from plans themselves. And, we know that the Pension Benefit Guaranty Corporation (PBGC) is paying benefits to millions of retirees because this ERISA agency exists. There is no way to know where we would be had ERISA never been enacted, since we do not know employers or individuals would have done were we still in the pre-ERISA legal environment, but with all the other changes demographically, domestically and globally that we know have occurred, I shall leave such speculation to others.

ERISA has amended outcomes: All of these advancements in the financial wellbeing of retirees and future retirees are the legacy of a voluntary system that has flexed with changes in the economy, with workforce changes, working alongside Social Security, and other in-kind income and benefit programs from the government, and other voluntary programs. The Organization for Economic Cooperation and Development (OECD), World Bank, and other international comparisons document that the post-ERISA U.S. system is one of the best funded and most stable in the world, when judged against voluntary programs working in combination with annuity paying public social insurance programs. Comparisons to other nations with only mandatory programs produce a less favorable picture when looking at the issue of retirement narrowly, but looking more broadly at the overall economic state of nations and populations, the U.S. economic system certainly shows to be near the top of the heap. Whether or not our overall economy would function better with a mandatory system than the voluntary system, is an unanswerable question, since there are so many other differences across nations.