ERISA—Still ‘Nifty’ at 50

 I’ve long relished telling “newbies” to the retirement space that ERISA was the second big executive act of then-newly enshrined President Gerald R. Ford—less than one month after he took office. 

In fairness—and I’m not exactly a kid—I was barely out of high school when that event occurred.  I’ve never had a benefits program (retirement OR healthcare, and us retirement geeks tend to forget that ERISA also has sway over workplace health plans) that wasn’t operating under its auspices—and so, talking about what ERISA has done/changed requires going back before my personal experience. And yet, despite the disparaging acronym “Every Ridiculous Idea Since Adam,” what ERISA has accomplished—and what has emerged in its aftermath—seems truly remarkable to me. 

ERISA is, of course, the Employee Retirement Income Security Act of 1974—and on Labor Day 2024, that legislation will be 50 years young. Not that ERISA created either the concept or the reality of pensions and retirement plans; in fact, the former dates back to the time of the ancient Roman armies. But in America, the first private pension plan was that of the American Express Company in 1875—crafted in an effort to create a stable, career-oriented workforce. By 1899, there were (just) 13 private pension plans in the country.[i]

The reality is that employee pensions had very few protections under the law before ERISA—there were no rules around funding or protections for benefits if the plan sponsor went bankrupt or was sold. Many plans had long vesting schedules requiring as many as 20 to 30 years of service, some plans required employee service periods to be “uninterrupted,” and there were situations where companies reportedly terminated employees just a few months before vesting to avoid having to pay their pension benefits. 

Indeed, ERISA represented a major shift in attitude—inserting the federal government into an oversight role over what, until that point, had pretty well been left to the parties to the employment contract; employers, workers and unions. Perhaps most importantly, it established ERISA’s federal law preemption over what might otherwise have been a mishmash of state regulations and requirements.   

That said, ERISA did not require any employer to establish a retirement plan. It “only” required—and still requires—that those that establish plans meet certain minimum standards. However, the law did a number of things that we take for granted today. At a high level, it established federal standards for things like vesting, participation and eligibility. It established rules regarding reporting and disclosure about plan features, funding and investments to participants—and via mechanisms such as Form 5500, reporting to the government as well. It put limits on benefits—and gives participants the right to sue for benefits and breaches of their fiduciary duty under that law. 

Of course, ERISA wasn’t about making it easy—it was about making sure that the promises made to workers were upheld—and in that sense the EMPLOYEE retirement income security act was aptly named. The poster child for this undertaking was, of course, the bankruptcy (and discarded pension promises) of a major U.S. automaker[ii] (Studebaker,[iii] though arguably it was the assumed pension obligations of Packard that really did it in). And in that regard, SECURITY of those promises[iv] was paramount—it was about quality, not quantity—about ensuring that the promises made were promises kept.

Notably, ERISA established fiduciary duties for those managing retirement plans—requiring that fiduciaries act in the best interest of plan participants and beneficiaries. It laid the groundwork for a definition of fiduciary which would, a year later, find form in the so-called five-part test—which would hold for nearly 50 years.[v]

Has It Worked?

Has ERISA “worked”? Well, in signing that legislation, President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.”

As of the latest (2021) numbers available, that system has grown to exceed $13 trillion (and another $11.5 trillion in IRAs, much of which came from that private retirement system), covering nearly 100 million active workers (146 million in total) in more than 765,000 plans. Indeed, the Labor Department recently reported that plans disbursed $322.5 billion more than they received in contributions during 2021.

That said, the composition of the plans, like the composition of the workforce those plans cover, has changed significantly over time. While much is made about the perceived shortcomings in coverage of the current system, the projections of multi-trillion dollar shortfalls of retirement income, the pining for the “good old days” when (people act like) everyone had a pension (that never really existed for most), the reality is that ERISA—and its progeny—have unquestionably allowed more Americans to be better financially prepared for a longer retirement than they otherwise would be.

Fifty years on, ERISA—and the nation’s retirement challenges—may yet be a work in progress. But it’s hard to imagine American retirement without it. It is a rich legacy that we all benefit from today—and—with luck and the ongoing work to improve upon it—will—for decades to come.

Happy birthday, ERISA!

 

---

[i] Steven A. Sass, The Promise of Private Pensions, The First Hundred Years, at 9 (1997).

[ii] I’d wager that a majority of Americans have never even heard of a Studebaker, and the notion that a major U.S. automobile maker once operated out of South Bend, Indiana would likely come as a surprise to most. The Studebaker brothers (there were five of them) went from being blacksmiths in the 1850s to making parts for wagons, to making wheelbarrows (that were in great demand during the 1849 Gold Rush) to building wagons used by the Union Army during the Civil War, before turning to making cars (first electric, then gasoline) after the turn of the century. Indeed, they had a good, long run making automobiles that were generally well regarded for their quality and reliability (their finances, not so much) until a combination of factors (including, ironically, pension funding) resulted in the cessation of production at the South Bend plant on Dec. 20, 1963.

[iii] Roughly 70% of Studebaker’s workers were left without their promised retirement benefits after the South Bend, Indiana plant was closed in 1963. Of some 10,500 current and former employees in the pension plan, about 4,000 with more than 20 years of history at the company received only about 15 cents for each dollar they expected—roughly 3,000 shorter tenured employees got nothing.

[iv] It's been opined by some that ERISA was responsible for the decline of traditional defined benefit pension plans—and certainly the vesting standards, reporting scrutiny, funding standards and the pension insurance premiums from ERISA’s formation of the Pension Benefit Guaranty Corporation (PBGC)—all designed to forestall outcomes like the Studebaker bankruptcy’s impact on its workers’ pensions played a part. While ERISA’s transparency requirements—and those funding requirements—have certainly been economic factors, it seems more likely that wide swings in interest rates, the accounting rigor imposed by FAS 87, the benefit limits imposed—and the elevation of those liabilities on the corporate balance sheet were the real culprits.

[v] Though with litigation pending, the five-part test still lives!

Facts Versus Factoids

 “What if the entire retirement-crisis narrative playing out in opinion polls, the government, and the media was a massive case of confirmation bias?”

That’s the provocative position of an intriguing new white paper titled “America’s ‘Retirement Crisis’: The Emperor Has No Clothes” by Andrew Biggs.[i]  Readers of my work will note that with frightening regularity there are any number of assertions, “studies” and surveys all painting a dismal picture of the state of the nation’s retirement—each and every one embraced and promoted with attention-grabbing headlines without so much as a question as to the veracity of the underlying data, the logic of the conclusions drawn, or the motivations of the proponents that have drawn them.

Consequently, I was delighted to come across this paper that provides a detailed, thoughtful, and data-driven analysis that focuses on a number of points that have been made (and uncritically trumpeted by the media) by none other than Teresa Ghilarducci[ii]—points that Biggs’ analysis concludes are “either trivial or inaccurate.” More specifically, he comments that these “points that are true do not necessarily lead to the conclusion that Americans have undersaved for retirement, while other points that could potentially lead to such conclusions are not factually accurate.”

Here are the 10 claims asserted by Ghilarducci/Cook in an Op-Ed (calling for folks to “urgently get over our retirement crisis denial” along with a pitch for the ironically named “Retirement Savings for Americans Act”)—and Biggs’ data-driven responses.

Claim 1: The Poorest Portion of Americans Do Not Have Sufficient Savings

It’s not so much that the statement is inaccurate—but Biggs argues that “their problem was not that they failed to save enough for retirement; it was that they were poor throughout their lives.” While noting that he has long argued for increasing Social Security benefits for the lowest-income retirees, he explains that “these households’ unusual predicament says nothing about their own retirement savings, much less about the US retirement system as a whole.”

Claim 2: 10% of Seniors Live in Poverty

This claim Biggs acknowledges is accurate “if we exclude the income seniors receive from retirement accounts such as individual retirement accounts (IRAs) and 401(k)s.” Biggs doesn’t accuse Ghilarducci (and Christopher Cook) of deliberately glossing over this significant point, though he does point out that this “shortcoming” in poverty measures for seniors “has been well-known by retirement experts for over a decade.” 

Well-known, and well-documented, as it turns out, and Biggs provides a half-dozen written acknowledgements of that shortcoming over the years. Among those, he cites a 2012 report by Social Security Administration researchers that pointed to that Census Bureau data as “greatly” unreported distributions from DC plans and IRAs, “posing an increasing problem for measuring retirement income in the future.”

Perhaps more significantly, Biggs cites information from a new dataset put together by the Census Bureau that finds not only that “The true median income of households age 65 and over increased from $43,700 in the CPS to $55,610 in the more accurate NEWS dataset, while the incidence of poverty fell from 9.75 percent to 6.42 percent.” In other words, even by those measures, seniors’ risk of poverty fell by more than one-third over a 28-year period “in which seemingly everyone came to believe the US retirement system was doomed,” Biggs writes—oh, and the annual income of the median households age 65 and older increased by 32% over that same period.

Claim 3: Retirees Are Subject to Exorbitant Long-Term Care Costs   

Ghilarducci (and Cook) claim that the average American turning 65 today will incur $120,900 in future long-term services and paid care—an assertion Biggs characterizes as a “hall-of-fame level of misdirection”—and he’s kind in applying that label.

Biggs explains that the $120,900 figure cited by Ghilarducci is the total cost of long-term care, not the cost borne by seniors—EVEN THOUGH the source Ghilarducci relies on “makes clear that $120,900 is the sum of costs covered by Medicaid, other public programs, private insurance, and, finally, out-of-pocket expenditures.” Instead, Biggs notes that the true average out-of-pocket cost to seniors beginning retirement at age 65 is $24,029—and that’s NOT per year, but over their entire retirement.

Claim 4: Middle-Income Retirees Are at High Risk of Downward Mobility

Biggs notes a couple of issues with this assertion; that it’s meaningless (it’s widely accepted that individuals can maintain that lifestyle in retirement on less than 100% of pre-retirement income, hence the common targets) and—“it’s almost surely false.”

To that point, Biggs challenges Ghilarducci’s claim that 40% of seniors will see their incomes drop below 200% of the poverty line—pointing to a 2017 Census Bureau study that tracked household income five years before and after retirement—and ultimately concluding that (only) about 4.1% of near-retirees with incomes above 200% of the poverty line would meet Ghilarducci’s definition of “downwardly mobile, less than one-tenth the number she projects,” according to Biggs.

Claim 5: Seniors Cannot Afford Emergencies 

“Roughly half of Americans (49.4%) aged 55–64 say they could not afford an emergency of more than $2,000.”

Once again, a statement that is factually accurate is being misapplied to retirees. Biggs notes that while only 23% of respondents aged 18–24 could handle a $2,000 emergency bill, and just 47% of respondents aged 45–54 felt capable, more than two-thirds (68%) of 75-and-over households stated they could do so. “The fact that not every retiree can cover every financial emergency using cash says nothing negative about the US retirement system, since seniors are far better able to weather financial emergencies than are younger adults,” Biggs notes.

Claim 6: The United States Has a Low Ranking in the Melbourne Mercer Global Pension Index

Admittedly, this one is a pet peeve of mine. The index has been published for a bit over a decade now, and the U.S. winds up in the lower-middle grouping—Biggs comments that “this index should be treated with caution because it is not a measure of a retirement system’s results. Rather, it measures the features of a retirement system that pension consultants tend to favor.”

Biggs notes that the U.S. gets “dinged” for things like “not requiring that retirees annuitize part of their savings, even though Social Security benefits—which form the base of retirement income for everyone and the majority of income for lower-earning households—are already paid out as a lifelong inflation-indexed annuity.” He also notes that if you look not at design but at results, you get a whole different perspective. Among the data points he cites is this one: for median disposable incomes of residents aged 65 and above, the U.S. ranked second…after the tiny tax haven of Luxembourg. 

Claim 7: Too Many Seniors Claim Social Security Early

The claim here by Ghilarducci is that “Due to financial pressures and inadequate retirement savings, 1 in 5 seniors claim Social Security before their full retirement age, thus losing up to 30 percent of their full benefit.” As Biggs notes, “there’s a lot to unpack,” specifically “one (claimed) fact, that ‘1 in 5 seniors claim Social Security before their full retirement age’; one (claimed) cause, that these Social Security claiming patterns are ‘due to financial pressures and inadequate retirement savings,’ and one (claimed) consequence, of seniors ‘losing up to 30 percent of their full benefit.’” 

As it turns out, the 1 in 5 is understated—Biggs says it’s actually closer to 1 in 2. But then, he states what should be obvious; that people claim when they do for lots of reasons. Moreover, he notes that as recently as 2005, 74% of retirees claimed benefits before their full[iii] retirement age, “a far higher rate than today despite the Social Security retirement age in 2005 being nearly two years lower than at present.” He also comments that “whatever the reason for early Social Security claiming, fewer Americans are doing it today than they were in the past.”

Claim 8: Available Jobs to Retirees Are Physically Demanding

To Ghilarducci’s claim that “More than 25 percent of older white workers and over 40 percent of older Black and Hispanic workers toil in physically demanding jobs,” Biggs comments that “the question isn’t whether Americans can work forever—we know they can’t—but whether today’s older workers can remain in the workforce longer than they did in the past.”

Among other studies, Biggs shares data from the Social Security Administration that—based on a definition that the job required regularly lifting up to 50 pounds—the share of retirees who were last employed in physically demanding occupations declined from 20.3% in 1950 to 9.1% in 1980—and that researchers at the Urban Institute updated these figures through 1996, finding a further decline to 7.5%. 

Claim 9: Widespread Retirement Anxiety

Biggs acknowledges that “Some people worry about retirement because they are not well prepared for retirement,” and that worrying about retirement planning is “fully understandable” even among those who are on track. But he then points to reports from EBRI, the RAND Corporation, and Gallup that revealed that individuals’ worries about retirement faded dramatically once they were actually IN retirement. He turned to the same Federal Reserve data on which Ghilarducci based her claims (caution—this is self-reported data), which revealed that while in 2013, 36% of Americans aged 55–64 reported they were “finding it hard to get by” or “just getting by,” but by 2021, when that group was approximately age 65–74, only 16% reported the same financial condition.

“Similarly, the share reporting they were ‘living comfortably’ increased by 22 percentage points,” Biggs explains. “If Americans nearing retirement in 2013 possessed inadequate savings and thus had something to truly worry about, one would expect nearly the opposite results.”

One can’t help but note that one big reason people might be worried about retirement is the merciless flow of scary headlines and interviews with prophets of doom…telling them they should be worried…

Claim 10: Retirement Income Has Flatlined

To this one, Biggs observes calmly, “If retirees are so poor, their savings so low, and their incomes so stagnant, how has their spending risen by 29 percent above inflation over 18 years? How did they afford it? Where did the money come from?” 

It’s really a rhetorical question—and one that he answered earlier: “Household surveys using the Census Bureau’s definition of ‘money income’—that is, only money received on a regular basis, while excluding the vast majority of withdrawals from IRAs and 401(k)s—dramatically understate retirees’ true incomes. The Consumer Expenditure Survey (CES), which is the source of Ghilarducci’s claim, uses the Census Bureau definition that fails to count most retirement account withdrawals as income.”

“According to Census Bureau research using IRS data, the median 65-and-older household in 2004 had an annual income of about $44,810, expressed in 2018 dollars,” Biggs writes. But by 2018, median incomes had increased to $55,610, implying an annual rate of increase of about 1.55% above inflation—and assuming that same rate of increase (1.55%), Biggs observes that the median 65-and-older income in 2021 would have been $59,149 in 2018 dollars—a 32% increase since 2004. “So, is it shocking that retiree households’ spending increased by 29 percent over a period when their incomes increased by approximately 32 percent? Not at all. Once again, a seemingly devastating factoid presented by Ghilarducci turns out to be a big ‘meh.’” Though I’d have a different adjective in mind.

Biggs closes the piece with a section titled “What Do Retirees Say?” where he notes that while he’s prepared to take the Federal Reserve data noted earlier, and take the 3% of 65-74-year-olds who say they are “finding it difficult to get by” as those actually in a retirement crisis. He groups together the 37% who say they are doing “ok” and the 49% (yes, 49%) who say they are “living comfortably” as having enough (there’s another 12% who describe their situation as “just getting by”). Ghilarducci took issue with this assessment (she actually referred to his stance as a “wave of denial”) deigning only to count the 49% as having adequate income. Fortunately, Biggs has done his homework here as well, and cites plenty of research to back the notion that financial security does seem to increase with age.

The Bottom Line

Biggs classifies the debate here as one between facts and factoids, noting that “most of Ghilarducci’s 10 factoids are either true but trivial or nontrivial but untrue.” The claim that one-fifth of retirees have less than $100,000 in net worth and no pensions is more or less true, but it not only doesn’t prove the U.S. retirement system is in crisis, “it doesn’t even prove that these specific households face a retirement crisis, given that the Federal Reserve’s data show they have higher incomes in retirement than they did before retiring,” Biggs notes. 

Among the untrue assertions: 10% of seniors live in poverty, that the typical retiree will pay anything approaching $120,000 for long-term care, or that retirement incomes flatlined in recent decades.

“What the discussion over retirement policy needs is not factoids but facts—that is, accurate answers to relevant questions that shed light on the underlying issues being examined,” Biggs notes. “There is no need to turn upside down a retirement system that by objective measures is among the most successful in the world.”

Amen to that.

- Nevin E. Adams, JD

[i] Biggs, a senior fellow at the American Enterprise Institute, was previously the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts.

[ii] Most recently in an Op-Ed published in The Hill with Christopher D. Cook, a senior writer for The Schwartz Center for Economic Policy Analysis (SCEPA). Teresa Ghilarducci is, of course, a professor of economics at The New School for Social Research and author of “Work, Retire, Repeat.”

[iii] Noting the Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey that found that more than a third (35%) retired early because they could afford to do so.

The Biggest 401(k) Rollover Mistake

  Readers of these columns know that for years I held off rolling over my old 401(k) balances.

Oh, I had rational reasons for (not) doing so; the institutional pricing of a particular fund in one, the low fees in another, the managed account option in a third—but the reality was that the process of rolling over your accumulated savings has been—and in many cases remains—painful.

Rollovers are a big deal. Vanguard reports that annual contributions to IRAs ($701 billion as of 2020) far exceed all DC plan contributions, largely due to rollovers ($618 billion in 2020), while the Investment Company Institute claims that investors now hold an estimated $13.5 trillion in IRAs—“approximately $3 trillion more than in DC plans, despite the fact that 45 million fewer Americans own IRAs than participate in DC plans,” according to the report

Two things, in particular, stayed my hand over the years—trying to time the liquidation of funds (I know, but I’m human), and worrying about the timing I’d be out of the market while a hardcopy check found its way to me through the United States Postal Service. As it turned out—and much to my disappointment—both remained relevant issues as I consolidated my retirement savings.

One issue I didn’t face was one recently highlighted in a Wall Street Journal article, based on a new report by Vanguard. The headline of the former was “The 401(k) Rollover Mistake That Costs Retirement Savers Billions”—that mistake? Leaving those rollover balances in cash.

The Vanguard analysis notes that 28% of rollover investors[i] stayed in cash for at least 12 months, with minimal changes after the first three months following the contribution. More than that, the report notes that among rollovers conducted in 2015, 28% remained in cash for at least seven years[ii]—and explains that younger investors, women, and those with smaller balances are especially prone to staying in cash for years following a rollover.

Now, 28% is hardly a majority—and it pales in comparison to the number of individuals who contribute directly to an IRA who leave those balances sitting in cash. Still, the WSJ manages to find a situation where a couple who rolled over $400,000 into an IRA, and then “couldn’t figure out why they weren’t earning any money when the stock market was showing high returns.”

What seems a more common occurrence was another individual who had her $3,200 account automatically cashed out to an IRA—she was apparently unaware of the account until she got a statement from the IRA—and was dismayed to discover it was “not even in a high–yield money-market fund.”

Vanguard’s analysis is leading it to recommend a QDIA for IRAs (a cynic might wonder if the latter is leading to the former). The paper claims that such a sanctioned device would—for investors under age 55, anyway—relative to staying in cash—provide, on average, an increase of at least $130,000 in retirement wealth at age 65—$172 billion in long-term benefits to all rollover investors in retirement each year.

Let’s face it—while target-date funds were long gaining traction as a 401(k) investment, they really took off after the Pension Protection Act of 2006 provided structure and a safe harbor for their implementation as a default investment. Similarly, the Vanguard recommendation notes that “implementing an IRA QDIA today may involve offering IRA providers safe-harbor relief from fiduciary liability and permitting transactions that are at risk of being deemed ‘self-dealing’ and thus prohibited. Accordingly, it would be important to ensure that appropriate oversight and protections are in place to prevent investors from being exposed to high-cost default investment products.” 

Indeed. 

Because if there’s anything worse than the mistake of not investing your rollover—it’s not rolling it over in the first place.

 

---

[i] On the other hand, Vanguard comments that twice as many—55%—of direct contribution investors left those monies in cash.

[ii] Across all rollovers, the median time between rollover and investing was actually nine months, with 28% of rollovers that transferred in cash remaining uninvested for at least seven years.