ERISA’s Midlife Crisis

By Nick Thornton

September 02, 2014 at 10:27 AM

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The Employee Retirement Income Security Act was born into a tumultuous world, winning enactment only after years of repeatedly failing to overcome stiff resistance from the nation's business interests.

It was signed into law as the country, fatigued from the seemingly endless Vietnam War, was at the same time reeling from the constitutional crisis of Watergate.

A decade or so earlier, the nation's attention had been drawn to the need for pension and health benefit reforms after the Studebaker-Packard Corp. shuttered its Indiana automobile factory in 1963. More than 4,000 workers saw their hard-earned pensions go up in smoke. Abuses had occurred before, but the Studebaker case brought home the need for change.

New York Sen. Jacob Javits took up the legislative mantle and proposed a law in 1967 that would establish an array of new safeguards. But his efforts stalled in Congress, as had previous such attempts. Then, in 1971, a study spearheaded by Javits revealed that only a handful of American workers would actually receive the pension benefits employers were promising. His report drew the media's attention, which helped to bring the issue to the forefront.

On Sept. 2, 1974, less than a month after taking office, President Gerald Ford signed the act into law. (Six days later he would go on national television and pardon President Richard M. Nixon.)

Now, at 40, the law that eventually allowed for the creation of individual retirement accounts and 401(k) plans is functioning in a much different world.

Few people doubted the necessity of the law at the time of its inception. But a growing chorus of voices now wonders whether the law, amended repeatedly over the years, isn't in need of an overhaul.

Automatic enrollment mandates, the end of savings limits, better retirement income projections, better fee disclosure, a tightening of the rules for hardship withdrawals. There's no shortage of ideas on how to make ERISA work better.

ThinkAdvisor's sister site BenefitsPro.com interviewed industry leaders, academics and other insiders for their perspectives on what changes in ERISA would most help plan sponsors and plan participants as the law enters its fifth decade.

What follows are their insights and thoughts. So, happy 40^th, ERISA. But be forewarned: your birthday party may not be as well attended as you expected.

Hoping for 'clear, bright lines'

If there's one thing plan sponsors want above all else, it's a way to avoid legal hassles.

That's the very clear impression one gets in surveying some of the country's most respected legal counsel to employers. Sponsors are just weary of being subjected to the "bewildering labyrinth of ERISA," as attorney Howard Shapiro puts it.

Based in New Orleans, Shapiro is a partner in the Proskaour ERISA litigation group. He and his team are called on by plan sponsors, service providers, actuaries and others to defend claims brought under ERISA.

"No one is waking up and saying, 'Gee, how can I break the law today?'" says Shapiro.

Yet the lawsuits keep coming, fueled in large part by a lack of clarity in the law that, at least in Shapiro's way of thinking, exposes sponsors to too much fiduciary liability.

"Had you told me 1981, when I was born into the ERISA universe, that the world would lack clear remedies to ERISA's applications on its 40^th birthday, I'd say you were nuts," says Shapiro.

That's why he says his clients want one thing that the law seems unable to deliver in its current form: certainty.

"Some clear, bright lines regarding what is and what isn't appropriate in communications would be helpful," suggests Shapiro.

In other words, regulators can do more to help sponsors by issuing safe harbors to address vague areas of the law, especially those focusing on what kind of advice employers and their representatives can offer workers without exposing themselves to "stock-drop" and other fiduciary-duty types of lawsuits.

Also frustrating are provisions in the law that tie sponsors' hands on even mundane matters.

"As a technical matter, many routine transactions are actually prohibited transactions (under the law). For example, a plan sponsor's decision to use plan assets to pay a service provider is a prohibited transaction," Marcia Wagner, founding partner in the Boston-based Wagner Law Group, noted in a 2011 brief on the basics of ERISA.

Better safe harbors

Fred Reish's perspective is not so far off from Shapiro's. In his practice at the Los Angeles offices of Drinker Biddle, where his life's work has also been devoted to ERISA law, Reish counsels sponsors on compliance before they get served papers and have to prepare for court battle.

If you had to boil down his take on how sponsors feel about ERISA to one word, "fear" may be most apt, he says.

"Right now, the concern over fiduciary obligations is so great that it inhibits what sponsors can do to help their participants," said Reish. "Fear is slowing the development of new ideas. Clearly, that's not helping with the retirement funding issues the country is facing."

Specifically, he cites the issue of lifetime income projections sponsors provide to participants, the final rules for which are being hashed out by the Department of Labor and which are expected to be delivered in 2015.

Last year, when the DOL published its proposed rules and invited comment, the retirement industry responded with a raft of concerns. Primary among them were the inadequacy of safe harbors the DOL laid out in its proposal.

Lifetime income projections are widely regarded as an effective tool to encourage participant contributions. Many projection models exist, and many plan sponsors use them, though they are not yet required to.

Yet narrow, restrictive legal parameters of how sponsors are allowed to calculate and communicate lifetime projections may expose sponsors to even greater fiduciary liability than they now face.

The result could be counterproductive, says Reish.

"What if the projections are wrong? Even if the DOL implements specific rules, and specific safe harbors, they are still just projections. Will sponsors be protected from lawsuits then?"

When all is said and done, Reish says it comes down to this: "Sponsors need to know that if they do their job in a certain way, they're not going to get sued."

Shapiro says a specialized ERISA court may be in order, perhaps in the image of the SEC and FINRA arbitration panels that hear complaints in their respective jurisdictions.

"I'm not sure that it's the best idea," says Shapiro. "But the fact that the idea is being floated suggests a lot of existing confusion. And some level of dissatisfaction with how ERISA suits are now being resolved."

Shapiro says things have gotten so muddied that ERISA cases are practically determined on case-by-case basis. And when a law gets to that point, litigators are invariably going to end up spending lots of time on it, and sponsors lots of money.

"That may not be the most productive place to be at with ERISA, given the state of our country's retirement readiness," he says.

Reish, too, would like to see statutory and regulatory relief where ERISA isn't working well. Statutory relief would, of course, require an act of Congress. And acting isn't something Congress seems to be doing much of these days.

But all is not lost, according to Reish. "ERISA gives the DOL great authority to issue class exemptions," he said.

Class exemptions have been instrumental in allowing sponsors to conduct the business of plan design and implementation, while providing them assurance that they are not running afoul of ERISA when they set out to do necessary things like compensate providers to the plan.

In fact, according to the DOL's website, as of 2012, "approximately 50 class exemptions covering a wide range of plan transactions" have been granted.

That means the power exists for the DOL to provide "thoughtful regulatory relief," says Reish.

That's welcome, of course, but not as welcome to sponsors as a makeover, if not a full-blown overhaul, of the law would be.

Lower fees are just the start

Participants are benefiting from lower fees on their 401(k) plans in ways they weren't just a few years ago. One small St. Louis, Missouri-based law firm can take a good deal of credit for that, having won several favorable rulings in cases that ended up before the U.S. Supreme Court.

"It's good to see that fees have come down as they have received more attention," says Jerry Schlichter, whose firm, Schlichter, Bogard & Denton, has two cases at the moment waiting to be considered by the high court.

"Continuing that will enhance the retirement of American workers and retirees," he says.

Schlichter says he'd like to see ERISA interpreted by the courts to be "the powerful law it was intended to be, to help participants protect and build their retirement assets."

The participants his firm has represented want sponsors to be more transparent, and to be sure that they are offering only plan options with reasonable fees.

With a growing number of court decisions favoring plaintiffs, things are going well for Schlichter.

But while lower fees are vital to retirement security, they're not the only thing participants and their advocates want.

The fiduciary standard

Karen Freidman, executive VP and policy director at the Pension Rights Center, says her Washington, D.C.-based organization is busy on multiple fronts, from lobbying against clawbacks of benefits for retirees in multiple employer plans to fighting sponsors' efforts to de-risk pension plans, which she thinks exposes participants to massive risk.

And then there's the fiduciary standard debate.

"The financial services industry's lobby to thwart the DOL in updating rules on fiduciary status is absolutely outrageous," she said.

"Let the DOL issue its proposed rules, and let the democratic process of commenting on them commence. That is how this is supposed to work. Why is it being delayed?"

The world has changed dramatically from the time when ERISA was conceived, a time when 401(k)s were non-existent and IRAs were in their infancy, said Freidman. In her opinion, ERISA was effective at dealing with "20^th century" problems.

But times have changed, and she says so must ERISA. And so must the fiduciary standard.

"So now companies are trying to de-risk by offering lump-sum payments to participants. And we're going to send these people who have worked all their life off with a pile of cash they have to make last for 20, 30 years? Into a financial services world where there is no clear fiduciary standard? I'm sorry. But that's just dangerous," Freidman says.

ERISA, she said, failed to give the three agencies involved in its oversight adequate power to truly protect participants' rights.

"We've often said there should be one agency administering ERISA, with an internal ombudsman committed to dealing with individual participant issues, and lobbying on behalf of participant rights," she says.

She imagines a role similar to the participant and plan sponsor advocate position created at the Pension Benefit Guaranty Corp., which, in Freidman's opinion, was immediately effective in coordinating participant concerns with the regulatory process.

That position's title – participant and plan sponsor advocate – suggests that the interests of both would (or should) be aligned.

That's a primary question going forward: Can ERISA harmonize the needs of participants with the needs of sponsors, and vice-versa?

James Klein believes the interests of both are, in fact, aligned, more so than most think.

As president of the Washington, D.C.-based American Benefits Council, he has the ear of the biggest plan sponsors in the country.

"Participants have a need for financial wellbeing," he said. "And employers have a need for them to have that, too."

Klein says that ABC's members very much care about the retirement security of the people who work for them. After all, Congress has yet to mandate that they provide plans, he notes. Yet sponsors still do.

To skeptics, Klein has this to say:

"Employers need to be able to transition their employees toward retirement," he says, something that can't be done if they don't have the assets to leave the workforce.

In other words, the costs of investing in a defined contribution plans are less than it ultimately would cost sponsors if they couldn't transition older, more highly-paid workers safely into retirement, he explained.

Also, offloading retirement funding responsibilities to the government would ultimately mean a crushing tax exposure to sponsors, giving them one more reason to offer and maintain a retirement plan for their workers, said Klein.

Regarding transitioning older workers, he says ERISA has an important job to do, and some much-needed room for improvement.

Much has been written about current and future generations of retirees both needing and wanting to continue to work. ERISA makes it difficult for participants to draw partial benefits from their pensions while continuing to work for the same employer, in a reduced capacity, at reduced pay, he says.

"Current ERISA rules don't allow that. So artificial barriers are created. That needs to change," he said.

Participant advocates also want to see deferral and contribution caps changed, which would allow workers to save more to better prepare themselves for retirement.

Sponsors also want to be able to give more advice to their employees — and employees want that advice, Klein says. But the fear of fiduciary liability creates a culture of reluctance to deliver guidance to participants.

He says he hopes regulators take note of the reasons for the decline in DB plans.

"Volatile" funding rules that leave sponsors vulnerable when interest rates are low and ever-higher PBGC premiums helped encourage the shift away from defined benefits, he says.

"There is a disconnect when one set of policies makes DB plans harder to provide, and then another set of polices makes DC plans harder to provide," he says.

The fact that both sponsor and participant advocates all have passionate objections to ERISA in its current form may actually be the silver lining.

When all sides seem to be in agreement that change is needed, then perhaps the hard work of getting down to figuring exactly what changes are really needed can begin.

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