The Value of ERISA

Baby Boomers, for example, say they want to cycle in and out of work during their retirement years, while Millennials don’t like the word retirement, and research suggests we are better off referring to that time in their lives as the reaching of “financial security.” Each person’s goal for what his future will be like relates to his experience and how he has seen others live after leaving the work force.

My vision of retirement came, as I was growing up, from my grandfathers, both of whom were beneficiaries of long tenures at large companies—one in pharmaceuticals, one in book publishing. Both men not only received generous pensions (and one, a marvelous retiree medical package) but had been good savers, truly having a three-legged stool on which to sit during their golden years. Both had what I might now refer to as “brochure” retirements—two homes, one in the Northeast and one in a warmer climate, and both had time to pursue activities they loved.

Did my grandfathers know that the life they led in retirement was due in large part to a 1974 law called the Employee Retirement Income Security Act (ERISA)—which secured for them, as participants, the pension benefits they had been promised? Will the average worker who has the opportunity to participate in a workplace retirement plan ever acknowledge the importance of ERISA, a law created to ensure that companies couldn’t make promises they weren’t able to keep? Even if the law was originally crafted to protect defined benefit (DB) plans, it does have structures in place that serve those in defined contribution (DC) plans as well.

During our interview with Frank Cummings, an architect of ERISA who worked for New York Senator Jacob Javits in the late 1960s and ’70s, he referred to problems that the law was able to solve, some to the point where many people don’t even remember that those issues existed. As he explained, often people just assume plans have always been the way they are today.

As I thought about what he meant, I considered that those of us in the retirement plan industry who deal with ERISA today don’t take time to think about what went into the law. Instead, we think about it in relation to the issues of the day—which, ironically, mostly deal with 401(k) plans, which didn’t exist at the time the law was written, and might explain why it has had so many significant amendments since.

But what is our context, 40 years later? We’re enmeshed in a world of both DB and DC plans, and trying our very hardest to ensure that people will be able to replace their income when the time comes. The expense of defined benefit plans make them cost-prohibitive for most companies, but DC plans replacing DB plans means that many people have no employer-guaranteed component to rely on. They are on a two-legged stool instead of a three-legged stool—standing on the pretty shaky legs of Social Security and, perhaps, personal savings.

It’s impossible to know where we’ll be 40 years from now, but if the last 40 are any indication, the future state of retirement will look quite different from its present state. The industry talks about the “DB-ificiation” of DC plans as a way to improve plan participant outcomes, but we must remember that the value of DB plans was greatly changed by ERISA. The act gave those plans much of the security we associate with them today. Perhaps this is the time to consider what the value of the defined contribution plan must be as we move forward, to help Americans achieve financial security in retirement.

Looking back 40 years to the concerns the ERISA authors faced, I realized that to solve those issues, people had to be outraged enough to care to make a difference. When Studebaker Corp. closed and its workers who had been promised pensions did not receive them, there was a consensus in Congress that something had to be done. In today’s highly partisan environment, it’s hard to believe that ERISA was passed by such high margins—dissenters were in the single digits. What will it take to get people to come together as they did 40 years ago to solve the problems of today’s retirement plans? Each and every retirement plan adviser must ask himself two questions: What is the promise of a DC plan, and, perhaps more importantly, what should it be?