Landmark ERISA pension reform law sees mixed results 40 years after implementationReprints
Forty years after President Gerald Ford signed the first comprehensive pension reform bill into law, the Employee Retirement Income Security Act has produced successes and failures.
The impetus for the legislation President Ford signed on Labor Day 1974 came from the collapse of South Bend, Indiana-based Studebaker-Packard Corp. and the 1964 termination of its hourly pension plan covering members of the United Auto Workers union.
When it was terminated, the plan only had enough assets to pay the 4,500 active vested participants about 15 cents for every dollar in pension benefits they had earned.
The automaker's collapse was the start of a nationwide push to get pension reform through Congress, resulting in ERISA's first-time pension funding requirements, meaning companies could no longer promise benefits without putting any money aside to cover them. The law also created a federal pension insurance agency to provide additional protection for promised benefits.
“Studebaker employees thought they had earned benefits, but they were not protected when the company failed,'' said Scott Macey, president of the ERISA Industry Committee in Washington. “Today if you are promised a benefit, you are much more likely to get it. That is the overall success of ERISA.”
Since then, thousands of underfunded pension plans have been terminated after their employer sponsors went out of business or were unable to make the required contributions. But ERISA's creation of the Pension Benefit Guaranty Corp. assured that billions of dollars in unfunded benefits are paid for participants in failed plans. In 2013, for example, the PBGC paid $5.4 billion in benefits to more than 800,000 retirees once enrolled in the nearly 4,600 plans the PBGC has taken over.
“We cannot underestimate the good of the PBGC,” said James Klein, president of the American Benefits Council in Washington.
Besides protecting pension benefits, ERISA added security for employees' health care benefits.
For example, the Consolidated Omnibus Budget Reconciliation Act of 1985 that amended ERISA has been a boon to millions of employees and their dependents. It allows workers who lose their jobs to retain employer health care coverage for 18 months — and widowed, divorced or separated spouses for 36 months — by paying a premium equal to 102% of the employer group plan cost.
That COBRA safety net especially showed its value during the Great Recession of 2008-2009 when federal lawmakers passed legislation providing a 65% federal subsidy of COBRA premiums for displaced employees. That subsidy resulted in a doubling to 38% of the COBRA takeup rate for laid-off employees, compared with the months just prior to before the subsidy was available, according to an Aon Hewitt survey.
Meanwhile, ERISA helped put an end to “the disappointed expectations of private-sector workers covered by pension plans,” said Karen Ferguson, director of the Pension Rights Center in Washington. Perhaps the most significant pension benefit protection under ERISA is a requirement that plan participants earn a nonforfeitable pension after a certain number of years.
Before ERISA, as many as half of employer pension plans required at least 15 years of service to earn a benefit, according to the U.S. Bureau of Labor Statistics. ERISA set several vesting schedules, including what became the most popular one in which participants became first and fully vested after 10 years of service. A later law, the Tax Reform Act of 1986, shortened the requirement to five years.
The more rapid vesting has produced “clear economic value for tens of millions of workers,” said Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.
Indeed, ERISA and subsequent laws have solved the vesting issue so well that few today “even remember there was once a problem,” said Frank Cummings, a Washington pension attorney, who as a congressional staffer helped draft versions of the legislation that later became ERISA.
However, ERISA has been ill-equipped to deal with the biggest recent pension problem: the erosion of defined benefit plans.
As recently as 1998, 90% of Fortune 100 companies offered defined benefit plans to new salaried employees. Last year, just 30% did, according to Towers Watson & Co. And the decline in employer-sponsored defined benefit plans isn't limited to corporate giants. Last year, a little more than 23,000 employer plans were covered by the PBGC's insurance program, barely one-fifth of the plans covered in 1985.
“Defined benefit plans are moribund. No one is starting a new plan,” while many existing plans are being frozen, Mr. Cummings said.
Several reasons caused the fall of defined benefit plans, many of which have little to do with ERISA or later congressional initiatives, experts say.
“With the younger generations, they recognized that their careers weren't going to be with one or two companies, but would likely be with 10 or 12,” said Joseph Molloy, vice president of managed care benefits and direct contracting at North Shore LIJ Health System in Great Neck, New York.
Defined benefit plans, especially final average play plans in which benefits are tied to employees' salaries during their last years of service, appealed less to a more mobile workforce and employers.
Cash balance plans became the fastest growing defined benefit plan of the late 1980s and early 1990, their popularity stemming from a more rapid benefit accrual and an easy-to-understand benefit formula. But numerous lawsuits challenged the basic design of cash balance plans as discriminatory against older employees.
Many employers, tired of the regulatory and legal uncertainty, moved on to new approaches, often freezing defined benefit plans and enriching 401(k) plans.
If passing the 2006 Pension Protection Act “had happened 15 years earlier, we would have had a much different outcome,” said Kevin Wagner, a senior Towers Watson & Co. retirement consultant in Southfield, Michigan.
Although often thought of as a pension law, ERISA's legacy extends beyond pension plans.
Indeed, a core ERISA provision — pre-emption of state laws that relate to employee benefit plans — has enabled employers operating in multiple states to offer health care plans with the same benefits to employees, regardless of the states those employees live.
“You can have uniform benefits. This has made life so much easier for plan administrators,” said Marjorie Martin, a principal with Buck Consultants at Xerox in Secaucus, New Jersey.
“The challenge of complying with a jumble of multiple state health benefit mandate laws would have overwhelmed many employers,” said Amy Bergner, a managing director of human resources at PricewaterhouseCoopers L.L.P. in Washington.
“Pre-emption is the crown jewel of ERISA,” said Mr. Klein of the American Benefits Council.
To be sure, there have been legal challenges to ERISA pre-emption. In 1985, the U.S. Supreme Court affirmed the legality of ERISA pre-emption. The justices, though, said that it applies only to self-insured plans and not to insured plans.
Forty years after ERISA's passage, federal lawmakers do not have further changes to the statute under active consideration.
Still, some lawmakers, as well as many in the private sector, say a 1980 law that amended ERISA to require employers leaving underfunded multiemployer plans to pay a share of the plans' promised, but unfunded benefits, needs to be revamped to prevent a collapse of a PBGC insurance program protecting participants' benefits.
Another ERISA change employers say would be welcome would be to base, at least in part, PBGC employer premium rates on the financial health of plan sponsors.