ERISA Improved Retirement Security, But Hurt Pensions

The received wisdom is that the “the system has shifted dramatically from [defined benefit] to [defined contribution] plans” because of the Employee Retirement Income Security Act, Mark Iwry, a nonresident senior fellow for the Brookings Institution, said during a talk addressing the legacy of the ERISA at the ERISA 50 Symposium, hosted by the American Academy of Actuaries. 

But this isn’t quite true, Iwry argued. Instead of devolving to DC plans, we have moved “to an undefined saving system, where benefits and contributions alike are undefined,” Iwry explained at the event in Washington D.C.

Though panelists overall agreed that ERISA has been broadly beneficial for retirement savers, many expressed regret that it has also contributed to the long-term decline of traditional pension plans. Not only that, but the addition of 401(k) to the Internal Revenue Code also contributed to “DC in name only plans,” Iwry argued.

There are other plans, such as money purchase and profit sharing plans, that “are a real DC, as opposed to a 401(k),” where strictly speaking, the contribution is not actually defined, and the participant is left to “do it yourself” and take initiative on everything including “whether to rebalance—if they even know what that is.”

Private sector DB plans account for just $3.2 trillion of the $38.4 trillion in retirement assets held by U.S. households, according to the most recent data from the Investment Company Institute. DC plans account for $7.4 trillion, and individual retirement accounts—often created from rollovers of 401(k) plans—account for $13.6 trillion.

Iwry adds, in a subsequent interview, that Treasury Department auto-401(k) guidance, starting in 1998, marked a key inflection point in the post-ERISA period, prompting a transformation of the earlier 401(k) to a much improved, more pension-like “401(k) 2.0” with important automatic features such as auto enrollment and asset-allocated default investments as well as increased offering of retirement income options.

Lloyd Katz, the vice-chair for the AAA’s pension committee, explained that ERISA introduced many structural improvements to the retirement system. Those improvements include the fiduciary standard of the “prudent person rule” and additional disclosures to participants. But Katz too acknowledged that “defined benefits have declined,” while overall “coverage [for participants] has improved.”

Iwry attributed the shift to 401(k) plans largely to the expansion of the mutual fund industry and dominance of financial industry interests, among other factors, whereas Katz put it on the lower risk and simplicity of DC plans. Later in the conference, Andy Banducci, senior vice –president of retirement and compensation policy with the ERISA Industry Committee, attributed part of the decline of DB plans to high Pension Benefit Guaranty Corporation insurance premiums, telling PBGC representatives in the room: “You’ve got too much money.” PBGC was an institution created by ERISA.

He recommended taking PBGC premiums off-budget, meaning that the additional costs would not be counted as general revenue for the purpose of balancing legislation. Banducci argued that this current accounting system is irrational because the premiums are not general revenue and are earmarked for a specific purpose. Eliminating this accounting method would make it easier for legislators to cut premiums without needing to raise revenue from another source.

Bruce Cadenhead, the global chief actuary at Mercer, concurred and said, “The overall level of premiums has to come down.” Not only are they an obstacle to plan creation, but they also incentivize lump sum payments to remove participants from the plan solely to save money on premiums, he argued.