Erisa at 50: Retirement leaders reflect on what it got right, and wrong

It’s been 50 years since Congress passed the Employee Retirement Income Security Act, and despite the progress it has made, it has a critical deficiency, one former leader of the Employee Benefits Security Administration said.

“Put IRAs under the full protection of Erisa,” said Phyllis Borzi, who was assistant secretary of labor for EBSA in the Obama administration, speaking Thursday at the Erisa 50 Symposium & Gala. “Here’s what keeps me up at night. We are in the midst of a tsunami of exit of assets from defined contribution plans into the unregulated world of IRAs. I won’t be around at the 100th anniversary of Erisa, but I’m not sure that at the 70th anniversary we’re still going to have that pool of assets in defined contribution plans.”

In other words, she said, all the hard work to help ensure more retirement security for private-sector workers “might be back to zero” as baby boomers retire and roll their assets from 401(k) plans to IRAs. Although the Department of Labor’s fiduciary rule covers advice given for rollovers, IRAs are not baked into Erisa – and the new rule is also facing legal challenges. There are two lawsuits filed against the regulator over it, and the implementation of the rule has been delayed by the courts.

“If that’s where all this money that the tax system has subsidized began, then let’s make sure we are just as protective of that money regardless of the form, the delivery mechanism that it’s in,” Borzi said.

Thursday’s event allowed researchers, consultants, and former civil servants to reflect on how America’s retirement savings system has changed since the legislation. While participation in DC plans has increased over the past few decades, most agreed that the system could do significantly more to encourage people to save and invest for retirement.

“We have made tremendous progress in the last 50 years,” said Sudipto Banerjee, director of retirement thought leadership at T. Rowe Price. About 70 percent of private-sector workers have access to plans, though contribution rates have grown only slightly since the 2008 financial crisis, he noted. According to the firm’s own data, the average DC plan contribution rate was 7.3 percent in 2007, and it reached 7.8 percent last year, he said.

One area where the system has improved is asset allocation, with younger workers increasingly invested more heavily in equities, he said. In 2007, for example, 49 percent of people in their 20s had at least 80 percent of their account balance in equities, compared with 91 percent today, he said.

“I can’t overstate how important that is.”

As of last year, total retirement assets in the US were an estimated $38 trillion, with about $10.5 trillion in DC plans and $13.6 trillion in IRAs, data from the Investment Company Institute show. Less than half of US workers participate in employer-sponsored retirement plans, compared with nearly 90 percent or more of workers in the Australia, the Netherlands, Singapore, Sweden, and the United Kingdom, according to a paper this week from TIAA.

When 401(k) plans were incorporated into the tax code in 1978, they were not necessarily intended to be the predominant retirement savings mechanism that they have become. Still, the system has been updated, though the use of automatic enrollment and other features, that have made the plans more popular.

“The defined contribution plans were not intended to be the retirement system for us,” said Brigitte Madrian, dean and professor at the Brigham Young University Marriott School of Business. “The early plans were the ‘Field of Dreams’ approach: If you build it, they will come. Companies would set up a plan, often with a match, and the presumption was that smart employees would sign up for it if they wanted it. And if they didn’t sign up for it, they must not want it.”

Another former head of EBSA, Preston Rutledge, said that more could be done to help make 401(k)s “true retirement plans” that would help people create “their own paycheck for life” that would supplement Social Security.

“We live in a defined contribution society,” he said. “You’re seeing encouragement, tax incentives for smaller employers to set up plans… [and] we’re making plans more adaptable to getting in-plan annuities for their accounts.”

The rise in state initiatives, including automatic IRAs, is promising, and the country is getting closer to the possibility of a federal auto IRA, he said.

Retirement legislation is one of the few areas where bipartisan support is likely, even in the highly politically divisive Congress today.

Regardless, a lesson from the beginnings of Erisa is the importance of building a constituency, Borzi said. Despite a lack of requirements before the legislation for pension funding, businesses were opposed to new rules, as were some unions that didn’t want government oversight of their retirement plans, she said.

But there was increasing attention to retirement savings catastrophes facing workers, as those with pensions were at the mercy of employers – and bankruptcies, such as that experienced by Studebaker – left people with pennies on the dollar that they were promised, she said.

And following former President Richard Nixon’s impeachment in 1974, Washington needed a win. As a bill, Erisa was nearly complete, Borzi said.

“They decided to do it on Labor Day in 1974 as a symbol that the government could still work, not withstanding the trauma of the Nixon impeachment,” she said.

“From the beginning to the end it was bipartisan, and it think that is really important. It’s one of the reasons why the statute has lasted this long.”