September marks the 40 year anniversary of the Employee Retirement Income Security Act of 1974, otherwise known as ERISA. Referring to the laws regulating employee benefit plans, ERISA has evolved since its inception to accommodate a changing landscape for the American worker. To commemorate the 40 year milestone, we decided to look back over the last four decades to review what the Act has accomplished and touch on what’s ahead for ERISA.
How it all started
The genesis for ERISA began before 1974, essentially taking root in 1961 when automobile manufacturer Studebaker closed and couldn’t afford to pay their workers the pensions that were promised to them. A deal was eventually worked out, but this case brought to light that oversight was needed to insure that companies paid employees what was promised in terms of company defined benefit plans.
What was created
Essentially, the law laid out the rules for defined benefit plan sponsors on participation, funding, vesting, reporting and fiduciary duties. The rules have advanced since inception to account for advancements and the creation of defined contribution plans like company 401(k)s:
Funding: The Pension Benefit Guarantee Corporation, PBGC, evolved from ERISA, which guarantees the companies have the funding in place to pay the benefits promised to employees. Additionally, companies are required to have pension plans fully funded.
Vesting: Vesting rights were also established under ERISA, which provide employees a right to ownership over their plans based on time spent with the company or contributing to the plan.
Participation: A company’s obligation to pay promised vested assets to employees are defined – even if the plan is under-funded.
- Fiduciary oversight – consists of fiduciary reviews as well as fiduciary process and trustee reporting
- Plan design – ensuring that the plan specifically addresses the needs of your participant base
- Investment consultant – investment material and education provided to plan participants
- Plan administration and compliance procedure reviews and updates
- Provider search and management
What still needs to be changed
A major issue that has come to the forefront is participant advice, which can be a gray area. According to 2014 Federal Reserve data published in Pensions & Investments, investors currently hold $3 trillion in corporate defined benefit plans. That figure is dwarfed by the $5 trillion held in corporate defined contribution plans. As such, there is a much higher level of advice that is needed for participants when it comes to managing these plans and further clarification and regulation needs to be set forth by the government.
With so many relying on defined contribution plans to fund their retirement, the pressure on plan sponsors to live up to their fiduciary duty is daunting. At Fort Pitt, we have the ability to act as an ERISA 3(21) fiduciary advisor and/or as an ERISA 3(38) full investment advisor for plan sponsors. Our service is designed to alleviate some of this burden and provide a partial solution for companies struggling to meet these fiduciary duties and for the government to consider when formulating future regulation on fiduciary oversight.
Overall, we have come a long way since the Studebaker case, but ERISA must remain nimble and continue to adapt to the changing landscape of retirement savings for American workers.