SURVEY SAYS: 40 Years of ERISA

In the past 40 years, a number of changes have been made to the law through various legislation. Last week, I asked NewsDash readers which change to ERISA in the past 40 years they think has MOST helped participant retirement savings outcomes, and what suggestions they have for changes that would be helpful.

Nearly six in ten (58.7%) of responding readers are plan sponsors or work for plan sponsors, while 10.9% are or work for advisers/consultants, 26.1% are or work for TPAs/recordkeepers/investment managers, and 4.3% are attorneys.

The change to ERISA during the past 40 years that received the greatest percentage of votes for being the one that most helped participant retirement savings outcomes was the establishment of Section 401(k) qualified deferred compensation plans, at 44.7%. This was followed by the sanctioning of automatic enrollment subject to certain requirements, at 21.3%.

Seventeen percent of responding readers selected “increasing contribution limits and establishment of indexed increases each year” as the change to ERISA that has most helped participants retirement savings outcomes, 4.3% chose “addition of catch-up contributions for participants age 50 and older,” and 2.1 % each selected “creation of SIMPLE retirement savings incentive match plan for small businesses,” “establishment of Roth 401(k),” and “sanctioning of cash balance defined benefit plans as non-discriminatory.”

“Other” responses included the combination of auto enrollment and auto deferral escalation, and more stringent vesting on employer contributions, with one reader saying “ERISA originally allowed a 15 year graded vesting schedule which in 1974 seemed very generous!”

The following choices were not selected by any respondents:

• imposition of mandatory Department of Labor penalties for fiduciary violations;
• imposition of 20% mandatory federal withholding on distributions not rolled over, and establishment of eligible rollover to another qualified plan;
• new non-discrimination safe harbors and new definition of highly-compensated employees;
• stricter rules for hardship withdrawals;
• establishment of protections from bankruptcy of retirement plan assets;
• establishment of exemptions allowing advice to participants if certain requirements are met;
• establishment of qualified default investment alternatives (QDIAs);
• requirement to provide quarterly benefits statements to defined contribution plan participants;
• establishment of rules for providers to disclose fees to plan sponsors;
• establishment of rules for plan sponsors to disclose plan fees to participants; and
• removal of Roth conversion restrictions.

When asked what changes to ERISA they suggest to improve participant retirement savings outcomes, common responses included simplifying language of disclosures/communications to employees, removing deferral/contribution limits, eliminating rules that make DBs unattractive to offer, and making automatic enrollment mandatory. Responses included:

• Privatize PBGC
• Simplify. The language in fee disclosure notices, etc. is much too complicated for the average employee to understand. Use some examples of the possible outcomes for saving at certain rates for 10-40 years. A picture is worth a thousand words.
• Allow plan sponsors and TPAs to communicate with participants in plain English!! All 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 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 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 non-emergency 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 re savings plans, more like zippy, entertaining commercials instead of boring legal blather.
• Increased contribution limits
• Automatic Enrollment mandate for every employer-sponsored employee contribution retirement plan with only positive elections to opt out.
• eliminate the requirement for 401(k) nondiscrimination testing - safe harbor is too expensive for some employers
• Add protections or minimum employer contributions for employees whose positions are 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 1000 hours a year for one employer.)
• rejuvenation of defined benefit plans
• continue to increase amount that can be saved and provide additional incentives to employers for offering plans and to employees for saving.
• How about applying a KISS. While they're at it, send 'em over to the Treasury, too.
• First, and most importantly, DO NO HARM. Don't let ostensibly well-intentioned, but myopic idiots shut off access to these funds pre-retirement, and please don't restrict it so that people MUST take it out 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 you're trying to "fix?" Without the right "in" come, you can't possible achieve the proper "outcome." Oh, and while it hardly seems legislatively appropriate, how about a little truth-in-labeling? It would be helpful if it could be required that every time an academic uses the term "risk pooling" as an explanation for why their reform proposal is so wonderful they have to explain that it is really a euphemism for taking YOUR savings and redistributing it to other (unrelated) people when you die.

In comments, responding readers noted that ERISA’s intent was to protect pensions and commented about how the shift in the retirement landscape to employee retirement savings being mostly in defined contribution (DC) plans no longer matches that intent. Some shared memories or “birthday wishes,” and one reader offered us a benefit of ERISA not considered within the survey: “[I]t has provided me with a great livelihood - and more importantly, great prospects for a comfortable and fulfilling retirement.” Editor’s Choice goes to the reader whose comment could be viewed as either a humorous 40th-birthday “warning” or a commentary on revisiting the appropriateness of the law’s provisions: “Time for ERISA to have a mid-life crisis.”

A big thank you to everyone who participated in our survey!

Verbatim

ERISA didn't keep pensions healthy

Doesn't seem that long ago.

I remember ERISA being the topic at a CPA meeting when the law was newly passed. I had just graduated from college the prior year. Has it really been 40 years? Time flies when you are having fun working in the retirement plan world!

Establishing 401(k) DC plans was key in my opinion but close behind should be adding catch-up for those 50 and over (who can better afford to contribute more) and then the protection from bankruptcy to preserve money for retirement. Of course for this to really work people have to STOP taking out loans.

It may not be "broke" but it's not working, either. I miss the old "pension for life" days, but employers simply cannot afford to do that anymore. I don't even have a solution to suggest.

I turn 40 the same week as ERISA - I guess I was destined from birth to work with employee benefits!

Verbatim (cont.)

Having been in the biz since the beginning, I feel old....

In many respects, although I have benefitted from the passage of this law, I also remember an interesting comment made by a benefits profession at the time that ERISA actually stood for "Every Ridiculous Idea Since Adam"! Not completely true, but there is something to be said about some of the regulations that came out of this law!

I remember celebrating the silver (25th) anniversary with many of the original drafters of ERISA. This makes me feel old.

The most overlooked benefit of ERISA is the requirement to put the plan in writing, which leads to the fundamental rule, "thou shalt follow thy plan document."

Time for ERISA to have a mid-life crisis.

Let's celebrate 40 years of employers retaining legal counsel in order to effectively understand/implement their benefits.

lordy, lordy look who's 40

ERISA truly was a landmark law that was formed in a bipartisan effort over many years, passed under a Republican President and signed into law by Gerald Ford 24 days after Nixon resigned. From within our current political environment, the story of the passage of ERISA is unbelievable fiction.

I had a mentor that once said to (a young) me he'd forgotten more than I knew. With regard to your ERISA list, I now pass along that torch - though I'm not sure if I'm happy or sad about it.

I think it's fair to say that the world ERISA was designed to help had changed significantly before the ink was dry. That said, it has provided me with a great livelihood - and more importantly, great prospects for a comfortable and fulfilling retirement...