As ERISA marked its 50th anniversary this fall, there has been plenty of reflection on the profound impact this landmark legislation has had on the nation’s retirement landscape. It’s hard to overstate that impact, actually, for a law often referred to as “the most important law that nobody’s ever heard of” (outside of the retirement and employee benefits industries, anyway).
“While ERISA has laid a strong foundation for retirement savings in America, the work is not yet done.”
Michael Davis, T. Rowe Price
The Employee Retirement Income Security Act—better known as simply ERISA—was enacted in 1974—in spectacularly bipartisan fashion—in response to growing concerns about the security of private-sector pensions. The law came about following some high-profile pension failures, including the collapse of the Studebaker Corporation’s pension plan in the 1960s, which left many workers without retirement benefits. ERISA established minimum standards for pension plans, ensuring that benefits are protected and fiduciaries manage plans responsibly. It also created the Pension Benefit Guaranty Corporation (PBGC) to safeguard pension benefits for workers if their plan fails.
As 401(k)s and IRAs started to become more popular in the 1980s and the decades since, ERISA evolved to accommodate the newer retirement vehicles. Key changes included enhanced fiduciary responsibilities, greater emphasis on participant disclosure, and rules governing how contributions and investments are managed. The law also expanded to provide protection for retirement savings portability and flexibility, ensuring individuals could manage their retirement assets across various job changes and plan types.
As the workplace continues to evolve, ERISA has evolved right alongside it.
“Defined contribution plans have become the vital force behind a secure retirement for most U.S. workers, and while ERISA has laid a strong foundation for retirement savings in America, the work is not yet done,” Michael Davis, head of global retirement strategy at T. Rowe Price, said as the company presented its ERISA 50th Research Project in September. “By focusing on adoption of effective auto-features, addressing racial and gender savings disparities, and delivering personalized solutions for workers, we can continue to improve retirement coverage and outcomes for all Americans.”
Jeff Clark, Head of Defined Contribution Research at Vanguard, echoed that sentiment, and said that 50 years after ERISA, 401(k) plan design is stronger than ever. “The power of automatic savings solutions—such as auto enrollment and annual auto increases—has improved outcomes for participants,” Clark said.
While much has been written about the history of the law and important changes to it over the past 50 years, 401(k) Specialist wanted to take a closer look at what the next 50 years might hold in store. With that in mind, we asked some high-profile ERISA experts for their thoughts on where ERISA is headed and what retirement plan advisors need to be thinking about moving forward.
No Crystal Balls
Predicting how ERISA will evolve in the next 50 years is no easy task. One reason why, says Wagner Law Group Founder Marcia Wagner, is the heightened level of partisanship that currently exists making it difficult for even technical corrections legislation to be enacted. “Assuming that bipartisanship reemerges to some extent, it would be appropriate for Congress to consider the decline of the traditional defined benefit plan and its replacement by the 401(k) plan, as well as the phenomenal growth of IRAs,” Wagner said.
“Even if the Fifth Circuit again invalidates the DOL’s efforts to redefine those parties who are ERISA fiduciaries because they receive a fee, it is difficult to quarrel with the DOL’s conclusions that the manner in which the private sector operates currently is radically different from the manner in which it operated in 1974.”
Other than there being increased attention to the role of fiduciaries in the welfare plan context, Wagner said she does not believe the role of fiduciaries will change.
“Regardless of the particular issue, the way in which fiduciaries will need to address those issues over the next half century will be the same manner in which they have addressed them over the past 50 years, with a focus upon ERISA’s core fiduciary principles of prudence, loyalty, diversification of plan assets,” she said.
“Not only will the core obligations of an ERISA fiduciary remain constant, but for the most part (the treatment of forfeitures in defined contribution plans being a notable exception), the issues that they will be addressing are not always novel,” Wagner continued. “ESG issues are the same as those raised by apartheid in South Africa in the 1970s, and DOL’s attempts to modify the rules relating to investment advice fiduciaries are simply a current attempt to address the misalignment of interests between trustees and beneficiaries.”
Both Wagner and fellow noted ERISA attorney Fred Reish, partner at Faegre Drinker, said some of the most significant changes on tap for ERISA in the coming decades will likely be related to healthcare instead of retirement.
“Over the next 50 years, the biggest changes and the most litigation will be in the healthcare area,” Reish said, citing reasons such as the aging of Baby Boomers and the needs of older people for healthcare; the costs; the lack of transparency; and the fact that the healthcare practices are largely unexplored by litigation and publicity.
NEXT PAGE: Drivers of Retirement Changes
Drivers of Retirement Changes
In the retirement world, Reish said there will be three main drivers of ERISA evolution: lifelong income in retirement; universal coverage through payroll; and coverage for “solos” such as gig workers.
As far as retirement income is concerned, Reish said many retirees have a legitimate fear of running out of money, sparking the need for guaranteed income in retirement. But many have been reluctant to purchase annuity products—partly due to liquidity concerns and even due to negative perceptions around the word “annuity” itself.
But a new generation of in-plan guaranteed income solutions is starting to change that.
Reish said the challenge may be partially solved by larger employers who will add retirement income provisions, products and services to their plans. “That would include the right to monthly payments without fees, the ability to change the level, the ability to take special withdrawals, education on retirement income and issues, investment management services, mutual funds and CITs that are managed for income distributions, guaranteed products,” Reish said. “These large plans can offer transparency and institutional quality and pricing.”
For retirees who are in smaller plans, Reish said he thinks “we need a new vehicle…something like a pooled employer plan, but instead a pooled retiree IRA that is managed by a professional fiduciary and provides institutional services, products, services and costs.”
For gig-type workers—one-person independent contractors—Reish said several solutions are needed.
“One would be that the companies that hire them could include them in their 401(k) plans as if they were regular employees. That actually exists now for independent contractor insurance agents who work primarily for one company—so-called career agents,” he said. “There is a section of the Internal Revenue Code that allow the insurance companies to include those agents in their benefit programs, including their retirement plans, as ‘statutory employees.’”
Enabling Guaranteed Income Solutions
There is little doubt the coming years will see an increased focus on the decumulation aspects of retirement, with Gen X—the first generation to rely more heavily on 401(k)s and IRAs than pensions—following Boomers into retirement.
Wagner noted that provisions in SECURE and SECURE 2.0 have begun to address this issue, and the DOL will be considering providing annuity options in QDIAs.
“One of the societal issues that affects the decumulation phase of retirement is that individuals are living longer, in theory the period of retirement for many people will be 30-plus years, assuming that individuals continue to retire at age 65,” Wagner said. “As a policy matter, society wants individuals to have an adequate retirement income so that individuals do not exhaust their retirement income during their lifetime.”
Brendan McCarthy, Head of Retirement Investing at Nuveen, told 401(k) Specialist that ERISA has done a tremendous job of providing a way for American workers to save for retirement with more than $9 trillion in the U.S. 401(k) system today. Now it needs to help them in their retirement years.
“Whereas ERISA has been successful in getting the American worker to retirement, we see ERISA plans evolving to help the American worker get through retirement, as 40% of retirees still risk running out of money in retirement,” McCarthy said.
How can it accomplish this? By enhancing the ability to attain guaranteed income in retirement.
“Facilitate the use of institutionally priced in-plan annuities inside of defined contribution plans—allow for Americans to have the option of receiving a portion of their retirement savings in the form of guaranteed income that the worker cannot outlive in retirement,” McCarthy said. “Proposals like Q-PON would amend ERISA and compel plans to offer a menu of payout options at retirement so that participants can make better informed choices about how to spend down their nest eggs.”
The Q-PON proposal, or Qualified Payout Option, is an initiative designed to enhance retirement security by embedding retirement income options directly into retirement plan designs. The proposal aims to simplify the decision-making process for retirees by offering options such as systematic withdrawals or guaranteed annuity income, at the point of retirement.
McCarthy added that ERISA plan fiduciaries have always served, and will continue to serve, in the best interest of their plan participants. “Where we see evolution in this role is with respect to fiduciaries starting to provide greater consideration to the decumulation—or payout—part of their employees’ retirement needs and offering a way for their workers to have the option of pension-like lifetime income through their existing defined contribution plan.”
The legacy of ERISA, McCarthy said, is one of accountability for fiduciaries and ongoing policy evolution. “But it is an evolutionary time, not a revolutionary time. We are trying to recreate the benefits of defined benefit schemes within the defined contribution system—so lifetime income built into target date funds and plan defaults, building retirement assets over time throughout the multiple careers that the younger generation is now embarking on,” he said, going on to list student loan repayment matching and auto-portability as examples.
McCarthy said Nuveen sees the U.S. defined contribution system being enhanced on two other fronts through some of the legislative changes in both SECURE and SECURE 2.0. One is further increasing access to workplace retirement plans, particularly for small companies—making it easier for more Americans to save for retirement.
The second is enhancing the ability for Americans to save more by promoting greater use of auto enrollment and auto increase provisions.
NEXT PAGE: Increased Personalization
Increased Personalization
One of the themes to come out of the recent LeafHouse National Retirement Symposium was the dawn of a new era of personalization, which is being advanced by growing artificial intelligence capabilities. AI is being looked at as a gamechanger because it is making many more data points available, which can be particularly helpful in personalizing target date funds and newer offerings such as advisor managed accounts and in-plan guaranteed income solutions.
“Looking ahead, advice, financial wellness, and emerging technology like AI are all driving the future of plan design to be more personalized to continue to improve participant outcomes,” Vanguard’s Jeff Clark said.
“To address participant needs for assistance with portfolio management and financial planning, plan sponsors are increasingly offering managed account advice services. As defined contribution plans will continue to serve as the primary retirement vehicle for most workers, in-plan advice solutions will continue to increase in both plan offerings and participant usage,” Clark said. “Plan sponsors also recognize that their employees are often challenged by competing financial priorities. As a result, there will continue to be a large effort in improving participants’ total financial wellness, especially through digital channels.”
Technology and AI will help improve personalized experiences for participants, Clark added. For example, as the workforce becomes more mobile, there could be efforts to help smooth retirement savings behaviors between job changes, as well as preserve assets from prior retirement accounts.
“Given the success of automatic savings solutions such as auto enrollment and annual auto increases, perhaps more could be done to establish personal default savings rates or implement smarter defaults that set a savings rate based on various personal attributes like age or income,” Clark said. “In addition, along with the recent inclusion of auto-portability in SECURE 2.0, there will be more efforts in reducing retirement savings cash-outs and distributions at the end of employment.”
Increasing Access to 401(k)s
As Dan Doonan, Executive Director of the National Institute on Retirement Security, wrote in a September op-ed in Forbes, the most pressing retirement challenge facing the nation is that nearly half of the U.S. workforce is not participating in a workplace retirement plan. “This is a fundamental weakness in the U.S. retirement system because access to a retirement plan at work is critical for building financial security later in life,” Doonan said. “People are much more likely to save for retirement if they can do so automatically through their paycheck. For the U.S. retirement system to work, we can’t leave half of the workforce without a workplace retirement plan.”
This is a problem that the SECURE Act of 2019 and SECURE 2.0 in 2022 were specifically passed to address, and the provisions—many of which have still yet to be implemented—need to be given time to chip away at the coverage gap.
Doonan pointed out that ERISA seems to work well today for large firms, but not for smaller companies. “Running a pension or 401(k) can be difficult for smaller employers, so often, they simply don’t. And it’s likely that large firms are disproportionately represented in discussions about potential improvements to ERISA.”
To increase retirement plan access for workers, Doonan said it’s imperative to make it easier for small employers to offer or participate in retirement plans that have economies of scale and reduce administrative burdens on employers. He noted there have been steps in this direction with pooled employer plans (PEPs) no longer requiring a “common nexus” that severely limits usage, thanks to the SECURE Act.
As we look ahead toward ERISA’s next 50 years, the challenge remains clear: ensuring retirement security for all workers, particularly those employed by small businesses. While legislative advancements like the SECURE Act and SECURE 2.0 are important steps toward closing the coverage gap, much work remains. Achieving true progress will require sustained effort to create a more inclusive retirement system that fully meets the needs of the modern workforce.
EDITOR’S NOTE: This is the cover story from Issue 3, 2024 of 401(k) Specialist Magazine. Read the complete issue here.
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