ERISA at 40

Forty years ago this month, Congress passed and President Gerald Ford signed into law the Employee Retirement Income Security Act (ERISA)—a law created to protect employees entitled to benefits in private-sector retirement plans and group welfare plans.

Automobile manufacturer Studebaker Corp.’s plant-closure and default on fulfilling pension benefit obligations to many of its employees—leaving them just a fraction of what they had been promised, or even nothing—was seen as so egregious that the “Act to provide for pension reform” (the long title of the bill) received wide bipartisan support. After coming out of the Joint Conference Committee, and having been initially passed by significant majorities, the combined legislation was agreed to by the House on August 20, 1974. The vote was 407–2; it was unanimous in the Senate two days later.

The ongoing administration and enforcement of the far-reaching law requires the involvement of the U.S. Department of Labor (DOL), the Internal Revenue Service of the Department of the Treasury (IRS), and the Pension Benefit Guaranty Corp. (PBGC). It has undergone more than four dozen changes in the past four decades. On the following pages, we look at a timeline of some of those developments (admittedly, many are not included as we had limited space) and speak to various industry insiders—including one who was present at the act’s signing—about the importance of ERISA and its evolution.

ERISA Timeline

Major milestones of this legislation

• 1961: President John F. Kennedy creates the President’s Committee on Corporate Pension Plans.

• December 9, 1963: Studebaker Corp. shuts down its plant in South Bend, Indiana, precipitating the default of its retirement plan. Studebaker employees become a symbol of the need for pension reform.

• September 2, 1974: The Employee Retirement Income Security Act (ERISA) of 1974, enacted by the 93rd United States Congress, is signed into law, setting the minimum standards for retirement, as well as health and other welfare benefits. On this day, President Gerald R. Ford remarks: “This legislation will alleviate the fears and the anxiety of people who are on the production lines or in the mines or elsewhere, in that they now know that their investment in private pension funds will be better protected, [that] they have a vested right. … It certainly will give to those 30-plus million American workers a greater degree of certainty as they face retirement in the future.”

• November 6, 1978: The Revenue Act of 1978 revises the Internal Revenue Code (IRC) and reduces individual income taxes and corporate tax rates; under Section 401(k), which is passed separately, later, an employee can defer taxes on the portion of income he elects to contribute to a retirement plan, instead of making direct cash payments.

• January 1, 1980: Section 401(k) of the Internal Revenue Code of 1978 becomes law.

• August 4, 1981: The Economic Recovery Tax Act of 1981 (ERTA) amends the Internal Revenue Code of 1954 to encourage economic growth. Included was an across-the-board decrease in the marginal income tax rates in the U.S. It also allows all working taxpayers to establish individual retirement accounts (IRAs) and expands provisions for employee stock ownership plans (ESOPs).

• August 23, 1984: The Retirement Equity Act of 1984 establishes qualified domestic relations orders (QDROs) to ensure that retirement distributions to alternative payees will not violate ERISA.

• October 22, 1986: The Tax Reform Act of 1986 widens the tax base and eliminates a variety of ways to reduce taxable income, including restricting pension and IRA deductions. It modifies the required minimum distribution (RMD) rules to state that participants must begin taking their distribution by April 1 of the year after they reach 70.5 years of age.

• December 19, 1989: The Omnibus Budget Reconciliation Act of 1989 becomes law, insuring that retirement plan fiduciaries will receive Labor Department civil penalties equal to 20% of any amount recovered for violations of their fiduciary responsibilities.

• July 3, 1992: The Unemployment Compensation Amendments of 1992 are passed, requiring that plan sponsors transfer eligible retirement plan distributions to a qualified plan upon request by a participant.

• June 11, 1996: The Department of Labor (DOL) issues Interpretive Bulletin 96-1 to clarify its position about participant education. The bulletin offers guidance for fiduciaries who provide investment education, and reiterates that they are protected, under ERISA’s Section 404(c) safe harbor, from fiduciary liability for participant investment choices.  

• July 22, 1998: The Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 passes, changing the capital gains holding period for 401(k)s and the rules for 401(k) hardship withdrawals.

• June 7, 2001: The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) issues an increase in the amount of employee contributions for 401(k) plans and indicates future contribution limits. It also allows participants ages 50 and older the opportunity to benefit from catch-up contributions.

• December 14, 2001: The Department of Labor issues DOL Advisory Opinion 2001-09A—aka the SunAmerica opinion—sanctioning the offering of investment advice to retirement plan participants by a financial institution for a fee, so long as that advice is based on the computer programs and methodology of an independent, third-party adviser, thereby eliminating conflicts of interest.

• July 30, 2002: The Sarbanes Oxley Act of 2002 bars company directors and executive officers from trading employee securities from profit-sharing and 401(k) plans during blackout periods.

• April 20, 2005: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 protects retirement plan assets from creditors by excluding those accounts from a debtor’s bankruptcy estate.

• May 17, 2005: The Tax Increase Prevention and Reconciliation Act of 2005 revokes the income limits on Roth IRA conversions, beginning in 2010.

• September 23, 2005: The Katrina Emergency Tax Relief Act of 2005 makes those affected by Hurricane Katrina eligible for tax-favored withdrawals, recontributions and loans from qualified retirement plans.

• August 17, 2006: The Pension Protection Act of 2006 (PPA) reforms many U.S. pension plan laws and regulations, including by providing a safe harbor for automatic enrollment and contribution arrangements, creating qualified default investment alternatives (QDIAs), changing pension funding requirements and calculations, increasing Pension Benefit Guaranty Corp. (PBGC) premiums for underfunded pensions, and extending the EGTRRA’s IRA and qualified plan contribution limits.

• December 11, 2008: The Worker, Retiree and Employer Recovery Act of 2008 suspends all required minimum distributions for 2009 and reduces funding requirements for defined benefit (DB) plans; this provides limited relief from the economic crisis for plan sponsors and certain plan participants.

• October 2010: The DOL issues participant-level disclosure regulations, finalizing a rule that requires the disclosure of certain types of plan- and investment-related information to participants on an ongoing basis. The rules become effective April 1, 2012.

• February 2, 2012: Section 408(b)(2) requires retirement plan service providers to disclose to plan fiduciaries information regarding their compensation, to ensure that the fees charged to the plan and participants are reasonable. The final regulation becomes effective July 1, 2012.

• January 2, 2013: The American Taxpayer Relief Act of 2012 removes Roth account conversion restrictions for retirement plan participants, allowing those in 401(k) plans, 403(b) plans and 457 plans with in-plan Roth conversion features to move to a Roth account.

ERISA History

A ‘consumer protection’ plan for pension participants 

To add some color to the history of the Employee Retirement Income Security Act of 1974 (ERISA) on its 40th anniversary, Editor-in-Chief Alison Cooke Mintzer spoke to Frank Cummings, a Washington, D.C., attorney, law professor and specialist in pensions, employee benefits, employment and labor law. Cummings previously served as minority counsel for the U.S. Senate Committee on Labor and Human Resources, and was administrative assistant/chief of staff to U.S. Senator Jacob K. Javits, R-New York, during ERISA’s development.

PA: How did you come to work in Congress and for Senator Javits?

Cummings: I’d been working in labor law for the firm Cravath Swaine & Moore in New York when the Studebaker Corporation, one of the firm’s longest-standing clients, was in a terrible crisis, which ultimately ended with its shutdown. I was handling both the employment labor relations part of it and the pension part of it.

I left the Cravath firm and went to Washington when Senator Javits became the No. 1 ranking Republican on the Senate Labor Committee. He called me and, after an in-person discussion, asked me if I had any laws I’d like to write. I said that I’d love to try to fix what went wrong with Studebaker pensions. He hired me and encouraged me to design a pension law, telling me in substance, “You design it, and I’ll get it passed.” I stayed with him, with some interruptions, for almost eight years, and sure enough it finally passed.

PA: The law did not pass until ’74. By the time it passed, it was with very broad support. How did it go from little support to the final 407–2 vote?

Cummings: The original 1967 bill was Javits’ bill. Javits was a fabulous and fascinating guy, but he was in a minority of a minority party. He was very intense about getting things done. At the time, the idea of passing a law to encourage more pension plans was not really a concern. The unions took care of that, and the tax shelter made it tempting. The real problem was making sure that a person who already had worked for a long time with a reasonable reliance on the plan would actually receive his pension. But bills coming out of the Senate Labor Committee had to be sponsored by the chairman or a senior Democrat. So Javits went to his friend Senator Harrison Williams, a Democrat from New Jersey. He said, in substance, “You take the bill. I’ll be the co-sponsor, and between the two of us and our co-sponsors, we’ll have the majority and we’ll get it passed.”

We discovered an unusual way to bring attention to the issues in this bill. Faced with opposition from powerful interest groups and legislative entrepreneurs, we decided to work the bill through the media. We held local hearings around the country, getting testimony and letters from people impacted badly by pension plan “fine print.” We’d then respond to them, generating articles in local newspapers, and we built a wave that way.

The senior members of the Labor Committee asked the chairman for permission to hold local hearings. We would show up at the hearings and lead off with one of the workers who got screwed, followed by senators from that state, congressmen, governors, etc. People would testify. We went from place to place.

We had to work our way through and make bargains with the devil. What came out was pretty good, considering what had to be done in those days. People today may have forgotten how powerful the labor movement was in the ’60s and ’70s. Unions were the engine that drove employee benefits then.

What was interesting was that Democrat Senator John Dent, the chairman of the House Labor subcommittee, was from the Pittsburgh area and had many supporters from the United Steel Workers, one of the most powerful unions in Pittsburgh. The Steel Workers strongly supported ERISA, but the craft unions, which had multiemployer plans, were staunchly opposed to it. The AFL-CIO [American Federation of Labor and Congress of Industrial Organizations] was caught in the middle and so was Dent, who was responsible for ERISA in the House in 1974.

ERISA passed, not mainly because of things that happened in Washington but because of true stories that happened to Americans somewhere else. This successful effort to mobilize the media and public opinion overwhelmed the business community and the negative parts of organized labor and began persuading Javits’ colleagues in Congress to support pension reform legislation.

We had hurdles to surmount. The Parliamentarian in the Senate told us from the very beginning that any bill dealing with pensions would almost certainly end up within the jurisdiction of four committees: the House and Senate tax committees and labor committees, with dual or sequential referral. That was a good way for nothing to happen, at least not quickly, if at all. 

PA: From your perspective, what were the most important issues that ERISA addressed?

Cummings: In those days, employers’ pension plans did not have to provide vesting at all, except after actual retirement. That problem was so completely solved by the bill that hardly anyone can even remember it was ever a problem.

We had to solve funding, because you could be vested in a pension, but if there was no money there, vesting alone wouldn’t get your pension paid. That problem was solved—probably over-solved, because unpredictable pension funding burdens cause plan terminations and deter plan establishment in the first place, which can do more harm than good.

We had to solve the plan termination problem, which was basically to keep the pensions in pay status and have recourse against the employer and a guarantee if the employer collapsed—that was all solved by Title IV of ERISA.

Then there were the problems of fiduciaries. People have forgotten that, in 1973, a year before ERISA, the “fiduciary” was the trustee. Period. The people who had the real control of these plans, the in-house fiduciaries, were not considered fiduciaries.

The next question was, “How do you get service of process on these people?” These were state-law questions. A state court can’t serve anyone outside its state who isn’t doing business in the state. That wasn’t getting anything done.

These are the problems that existed in 1974 that got solved with ERISA: vesting, funding, termination insurance, keeping the people in pay status and recourse against the employer. But the central fact of ERISA, which people didn’t really focus on, is that ERISA was like a consumer protection plan. We weren’t telling the employer what kind of plan to have. We were saying: If you make a promise of a plan benefit, you’d better deliver, but you don’t have to make the promise in the first place. The statute left the employer completely free to decide whether it would have a plan or not.

PA: It’s so interesting to hear what you were dealing with and what you were thinking about.

Cummings: So many different people had ideas. Each player had a different motivation. We had to work our way around Senator Russell Long [D-Louisiana], who was the chairman of the Senate Finance Committee. He believed in employee stock ownership plans [ESOPs], therefore, we had to squeeze in ESOP protection. Dan Rostenkowski [R-Illinois], who served on the House Ways and Means Committee, mainly wanted protection against tax abuse—and to keep pension jurisdiction in the IRS [Internal Revenue Service].

Thinking back, the engine that drove ERISA was the AFL-CIO industrial unions. If you went to work for a steel company, you could be there for life. If you went to work for an automobile company, and it didn’t go bankrupt, you could be there for life. And your pension, earned over a lifetime, had to provide retirement income security.

I really believe that, had it not been for the AFL-CIO, there never would have been an ERISA. In my days as a management lawyer, the way to keep a nonunion worker was to offer him benefits that were better, or at least as good as, the union plan. People today in nonunion jobs don’t realize that those nonunion plans got there because of the unions, even though they weren’t unionized.

PA: I’ve heard that people wonder why certain issues were taken on and others were not.

Cummings: I keep telling people, “Look back 40 years.” We were dealing with the problems we had then; we weren’t trying to figure out what we would do about the problems that might come along later, unless they were causing an uproar. Why didn’t we deal with the women’s rights in the original statute? That came later. It was not on the front burner then. Why didn’t we address the cost of employer-provided health insurance coverage? Again, it wasn’t on the front burner then. There’s a natural selection there. To be covered, you have to be healthy enough to be working, and you have to be young enough to be working, and those things made cost less of a problem. In those days, we weren’t thinking about the unemployed. We weren’t thinking about the people between jobs.

In retrospect, you can look back and say, “Well, you should’ve done this and you should’ve done that.” However, the central pension problem at the time was, “How do you support the guy who works for you for a long time and relies on the pension plan? Is it reasonable for this worker to expect to get something and then not get it?” It’s too late for him or her to go back and start over; it’s too late to say, “I’ll have another career, and next time I’ll get it all right.” No. You have to provide retirement income security under the pension plan you’re already in. That was the name of the game, and that was the name of the statute.

In hindsight

Industry leaders weigh in about ERISA’s 40th anniversary  

To address the regulatory, public policy and retirement plan provider sides of our industry, we asked Ann Combs, principal and head of Vanguard Government Relations, and former assistant secretary of labor for the Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA); Robert L. Reynolds, president and CEO, Great-West Financial; and Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI), to offer their thoughts on the Employee Retirement Income Security Act (ERISA) at the close of its fourth decade.

PA: Which ERISA amendment do you think has most helped participant retirement savings outcomes?

Combs: I’d have to say that the Pension Protection Act of 2006 (PPA) provisions encouraging 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.

Reynolds: The PPA offered protection against fiduciary risk for sponsors who chose qualified default investments, such as 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 were scheduled to end.

Salisbury: The addition in 1978 of Sections 125 and 401(k) were the most significant changes to ERISA. They served to dramatically increase the number of vested participants who would retire with some economic value; with portability, facilitating career-long savings growth related to income growth, investment returns and life stages; and with life-event flexibility in retirement savings accumulation, ultimately creating meaningful account balances for the greatest number of individuals. This was complemented by amendments in 1986 to shorten vesting to five years and to end 10-year forward-averaging and capital gains treatment on many lump sums, as well as the PPA 2006 automatic features provisions.

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

Combs: Coverage is still the big challenge. Recent developments have greatly benefited those who have plans and have 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 could expand coverage. We know there’s a desire for lower-cost and less burdensome administrative options among small businesses.

Reynolds: Reduce the significant costs and administrative and legal hurdles that discourage small businesses from offering a workplace savings plan. Although plan options exist for small employers, such as SIMPLE plans and individual retirement account (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, which simplify administration and reduce risk without increasing cost, would encourage greater adoption of 401(k) plans by small employers.

PA: Please share any overall comments about the 40th anniversary of ERISA.

Combs: 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.

Reynolds: ERISA grew out of the need to protect employees’ retirement savings, which it has done since 1974. 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 a fully automatic plan design, adopt a new norm of 10%-plus 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.

Salisbury: The Organization for Economic Cooperation and Development (OECD), World Bank and other comparable international institutions 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 with other nations that have only mandatory programs produce a less favorable picture when looking at the issue of retirement narrowly. But when you look 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.

Improving ERISA?

Suggestions for how the law can evolve  

When e-newsletter readers were asked what changes to the Employee Retirement Income Security Act (ERISA) they would suggest, to improve participant retirement savings outcomes, responses ranged from making communications more reader-friendly to making automatic enrollment mandatory. Their words of wisdom included the following:

“Simplify. The language in fee disclosure notices, etc., is much too complicated for the average employee to understand. Include examples of possible outcomes for saving at certain rates for 10 to 40 years. A picture is worth a thousand words.”

“Allow plan sponsors and third-party administrators [TPAs] to communicate with participants in plain English! These notice and wording requirements mean certain failure of the goal since no one can understand what the notices and communications are saying.”

“Take the caps off maximum employee deferrals in plans that have an appropriate safe harbor.”

“Remove savings limits. Remove Internal Revenue Service [IRS] penalties for early withdrawals.”

“Require retirement income projections on quarterly statements to participants.”

“Find a way to simplify the law, especially since ERISA stands for ‘Every Ridiculous Idea Since Adam.’”

“Make deferrals easy for participants, and lots of safe harbors for fiduciaries.”

“Eliminate the legislative and regulatory bias against defined benefit [DB] plans.”

“Raise the penalty for non-hardship withdrawals, to encourage participants to strongly think about the impact of withdrawals. It is still too easy to take money from retirement plans for nonemergency situations.”

“Changes to ERISA? I’ll leave that to the behavioral economics scholars to ponder. I will say that, in general, participant communications are ineffective. Maybe plan sponsors need to hire ‘Mad Men’ to make the communications regarding savings plans more like zippy, entertaining commercials instead of boring legal blather.”

“Mandate automatic enrollment for every employer-sponsored employee contribution retirement plan with only positive elections to opt out.”

“Eliminate the requirement for 401(k) nondiscrimination testing—the safe harbor is too expensive for some employers.”

“Add protections or minimum employer contributions for continuously employed part-time employees—for example, many nurses, second-income spouses and those with multiple jobs who work every week but are not eligible for a retirement plan, because they do not work at least 1,000 hours a year for one employer.”

“Rejuvenate defined benefit plans.”

“Continue to increase the amount that can be saved, and provide additional incentives to employers for offering plans, and to employees for saving.”

“Don’t let ostensibly well-­intentioned folks shut off access to funds pre-retirement, and please don’t restrict things so people must take funds in the form of an annuity. You’ll only reduce the amount of money people are willing to save/commit—and isn’t that what we’re trying to ‘fix’? Without the right ‘in’-come, you can’t possibly achieve
the proper ‘outcome.’”