Kevin Crain

Enacted in 1974, the Employee Retirement Income Security Act set crucial standards for pension plans in the private sector, safeguarding the interests of participants and their beneficiaries, with its foundational purpose to protect employees’ retirement income. Over the past five decades, we have witnessed a seismic shift from traditional defined benefit pension plans to defined contribution plans, fundamentally changing how Americans save for retirement and fund their retirement income.

A System That Must Evolve 

The success of ERISA in providing a framework for retirement savings is undeniable. By establishing fiduciary standards, vesting rules and minimum funding requirements, ERISA brought much-needed stability and accountability to the pension system. As economic realities and workforce dynamics evolved, the defined contribution plan—originally an unintended consequence of ERISA—became the dominant retirement savings vehicle for millions of American workers.

This has democratized investing, giving workers more control over their retirement savings. It has also shifted responsibility, decisions and risk from employers to employees. The success of that evolution is evidenced by close to 700,000 existing 401(k) plans with more than 70 million participants and total assets exceeding $7 trillion.

However, as we celebrate these achievements, we must also acknowledge that there is more work to do. The transition from DB to DC plans has shifted the burden of retirement planning squarely onto individuals, who need professional advice and planning tools to navigate the complexities of savings, investing and longevity. As our population ages, the definition of retirement has changed, and life expectancies have increased; ERISA and the DC system must evolve to meet the changing needs of American workers.

‘A Clear Path’ to a Retirement Paycheck

First, we must address the critical issue of retirement income adequacy. While DC plans have done an admirable job of accumulating assets for participants during their working years, the evolution is just starting in terms of providing sustainable, lifetime income. To strengthen this part of the system, policymakers, industry associations and the retirement services industry must continue to work together to develop and promote robust in-plan retirement income solutions, including insured and non-insured options. The same groups also should ensure plan sponsors have comfort and confidence to adopt retirement income solutions in their DC plans.

Since the passage of ERISA in 1974, retirement saving systems have advanced because of progressive retirement legislation, such as the Setting Every Community Up for Retirement Enhancement Act of 2019, which specifically advanced retirement income solutions by providing safe harbor provisions for plan sponsors to offer annuity options within DC plans. However, more can be done to incentivize the adoption of the growing inventory of in-plan retirement income solutions; educate participants about their benefits; encourage the adoption of retirement income options in all DC plans; and give participants a clear path to convert their retirement savings into a predictable post-retirement paycheck.

Improving the Retirement Transition

Another crucial area for improvement is pre-retiree education and retirement income planning tools. Many workers need help understanding how to transform retirement savings into sustainable income. Plan sponsors and service providers should offer comprehensive pre-retiree education programs that start at age 50, well before retirement. These programs should cover topics such as converting retirement savings into ongoing income, strategies for claiming Social Security, Medicare and post-retiree health care expenses planning, and broader financial planning and budgeting.

Furthermore, sophisticated yet user-friendly digital planning tools should be available to all DC plan participants. These tools will allow workers to model different retirement scenarios, considering factors such as part-time work in retirement and varying investment and withdrawal strategies. By empowering participants with knowledge and tools, we can help ensure that the transition from saving to spending in retirement is as smooth and successful as possible.

How to Integrate Social Security

Perhaps most critically, we must recognize the vital role that Social Security plays in retirement security and work to integrate it more fully with DC retirement income projections. The average retiree receives about 40% of their pre-retirement income from Social Security, making it an essential pillar for retirement income alongside retirement savings. Yet many Americans still need to fully understand the long-term implications of when to claim Social Security. This is evidenced by nearly 40% of Social Security-eligible individuals electing to start it at 62, the earliest age available. Only 10% elect it at the maximum benefit age of 70.

To address this, recent regulations mandating retirement income projections on DC participant statements should be broadened to integrate projected Social Security benefits information. This integrated approach would give participants a more holistic view of their projected retirement income. Additionally, planning tools and education programs should emphasize integrated decisionmaking for defined contribution savings and Social Security benefits, helping workers optimize their claiming strategies and overall retirement income.

A Call to Action

The retirement landscape will continue to evolve as we look to the next 50 years of ERISA. With new legislation, changing regulations and industry product advancement, retirement savings will continue to align with the spirit of ERISA.

By focusing on retirement income solutions, enhancing education and planning tools, and integrating Social Security into the broader retirement planning picture, we can build on ERISA’s legacy and ensure that it remains a cornerstone of retirement security for future generations.

The golden anniversary of ERISA is not just a time for reflection, but a call to action to secure the financial future of all Americans.

Kevin Crain is the executive director of the Institutional Retirement Income Council, a nonprofit think tank serving the retirement income planning community.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.