The Collapse of Employee Retirement Income Security?

If you stand back from the intricate legal and economic details of this year’s events and try to grasp what’s really happening to retirement security over the long run, it’s frightening.

ERISA, in the first place, was enacted to solve one central set of problems: the failure (in some circumstances) to vest, fund, and secure benefits under the then-dominant defined benefit pension system.

ERISA enacted five main cures for that illness: (i) earlier vesting, (ii) funding requirements, (iii) plan termination insurance,(iv) fiduciary standards, and (v) enforcement mechanisms -- plus, of course, the inevitable bells and whistles, not to mention broad federal preemption. The purpose was to make the system work better, but at the same time to make sure that the system could still safely rely on tax and other incentives to keep the voluntary and private pension system alive, growing, and prospering. The cure worked, the old illnesses disappeared, but the patient is now dying.

Some years ago, the whole thing began to come unglued -- but it has happened so gradually that the overall effect can only be seen from a distance. Here’s what I see.

First, the Defined Benefit (“DB”) part of the system -- the original main target of ERISA -- is disappearing (except in public plans, which were never covered by ERISA).

Second, enforcement under ERISA Title I has come to rely on class actions, partly because the cost of lawyers has gone up so high that individuals can no longer afford to use the enforcement system. And a benefit security system that can only work in class actions is not really beneficial to anyone except the lawyers. Further, an enforcement system that can only work in class actions carries with it the seeds of its own destruction, since the increased cost of defending such actions adds to the risk that the whole system (a voluntary system) will be abandoned.

Third, termination liability under ERISA Title IV has expanded by increasing the liability itself (e.g. OBRAs 1997, 1989), and more recently by attempting to invent a post-Chapter 11 liability for a pre-bankruptcy event (ERISA § 4006(a)(7)). Again, an increased exposure for plan termination inevitably leads to a decreased incentive to have the plan in the first place.

Fourth, the fiduciary provisions of ERISA, while quite workable in their original context, now face an end-run by use of such devices as “directed trusts” and 404(c) participant-directed accounts -- which of course are a further result of the collapse of the DB system.

Fifth comes sheer complexity -- which may be the bread-and-butter of technicians, actuaries, lawyers and accountants, but eventually kills both the goose and the golden egg. I have no better measure of it all than the sheer thickness of my paperback BNA copy of ERISA -- which no longer fits in my briefcase except by straining the hinges.
And so on. And on and on.

What will become of it all? Continued decline, of course. The symptoms are everywhere. Lawyers who, in earlier days, specialized in employee benefits, now spend more time on “executive compensation.” You can fit the whole of 409A in your briefcase without threatening to break the hinges. But that won’t provide or protect retirement security for employees. On the contrary, when the executives who design pensions don’t depend on the qualified plan for their own retirement, the system is on the brink of disaster. Perhaps if the “cap” on creditable compensation and maximum qualified plan benefits were raised substantially (doubled, tripled!) the correct incentive could be restored. I think that’s worth a try. But nothing will work unless and until the system is made simpler and allowed to reallocate the risks. The ERIC proposal a few years ago was on the right track. (See The ERISA Industry Committee, A New Benefit Platform for Life Security (May 2007)). Employers need to get back to the businesses they are good at (making things, etc.), and frequently that does not include making employee benefits. Most employers do not have their own doctors and hospitals -- they rely on others who are in that business. Perhaps it is time to put the pension system on that track.

Not every problem has a solution. It would be nice if this set of problems had one. But, alas, it may be quite a search, and then a stretch.

-- Frank Cummings