ERISA. Forty years after its enactment and still standing. In light of its evolution, one could say that ERISA should stand for the Employee Responsibility Income Security Act due to the shift of the burden of providing an adequate retirement income from the employer to employees, most of whom have little or no experience with determining how much they need to save or how to choose a suitable mix of investments.
The enactment of ERISA in 1974 accomplished several things. It set safeguards for certain employee benefit plans, including pensions, 401(k) and health and welfare plans. ERISA also helps protect trillions of retirement dollars accumulated by American workers not so much from market fluctuations but from fraud, self-dealing and poor oversight. Further, the law also mandated the separation of retirement plan assets from employer assets to correct one of the largest threats to satisfying an employers retirement plan obligations. Another core ERISA provision, pre-emption of state laws that relate to employee benefit plans, has enabled employers operating in multiple states to offer plans to employees under a uniform set of laws, regardless of the states where those employees live.
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ERISA provides protection to the American worker. The rules for retirement plans have been changed by ERISA in major ways by requiring minimum funding, uniform vesting schedules and a standard definition of employee service for benefit accrual and vesting. The rules also protect workers by requiring that all plan participants vest in the accrued benefits if a plan is terminated and prohibit companies from terminating or taking other action against employees to deprive them of plan benefits.
As we sit here today, 40 years after ERISA was enacted, its a new landscape. While defined benefit pension plans predominated in 1974, todays 401(k) plans and other now-common individual account plans (often called defined contribution plans), did not exist. Individual retirement accounts also did not exist. Plan assets were generally invested in publicly traded instruments. The most dramatic change on the investing front is the surge of model portfolios and target-date funds. Along with the new landscape, we still find there to be problem areas: underfunding of DB pension plans still puts plan participants at risk and legislation cannot eliminate bad behavior or financial market risks. However, the Department of Labor continues to press forward in its mission on improving these issues.
So yes, the world has changed considerably since the enactment of ERISA. Business has changed. Our demographics have shifted; our work environment has evolved from manufacturing to service-oriented businesses; our economy has suffered ups and downs; and business is more global. We are also living longer. This year, roughly 3.7 million Americans will celebrate their 65th birthday. By 2030, nearly one-fifth of the US population will be 65 or older. Despite the ever-changing world, ERISA remains strong and steady. The average American worker is far better off because of ERISA, which has held up remarkably well over the past four decades.
Hal Hunt is shareholder and national employee benefit plan audit practice leader at Mayer Hoffman McCann P.C, an independent CPA firm.
