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!
