Opinion: ERISA killed defined benefit pension plans, Yale Law School expert argues
This year marks the 50th anniversary of the enactment of the Employee Retirement Income Security Act (ERISA) of 1974, so Yale Law School professor John Langbein’s recent article, “ERISA’s Role in the Death of Defined Benefit Pension Plans,” seemed timely.
My guess is that many factors contributed to the demise of defined benefit (DB) plans, and ERISA is just one of them. Langbein further highlighted ERISA, arguing that the 1974 law “ultimately determined the fate of the U.S. DB pension system.”
First, a brief history. Retirement plan dates start from the last quarter of year 19.Day This is the century in which large, prosperous transportation industries and labor unions established benefit systems for their workers. By the 1920s, 40 percent of union members had insurance, but the Great Depression devastated union plans and led to the enactment of Social Security.
read: Retirement balances are at their highest in nearly two years, and the number of 401(k) millionaires is up 20%.
So in the 1940s, business and labor had to reinvent their pension systems. Pension coverage expanded dramatically in the 1950s, primarily through the establishment of new systems, and in the 1960s and 1970s, driven by expanded employment in companies that already had pension coverage. In the 1980s, about half of private sector workers were covered by retirement plans, and these plans were primarily defined benefits.
In a defined benefit plan, the employer makes contributions, pays benefits in the form of a lifetime annuity, and assumes investment and mortality risk. From an employer’s perspective, defined benefit plans help manage their workforce by encouraging longer tenure and efficient retirement.
But things began to change in 1980, and by 2000, the majority of workers with coverage relied on 401(k) plans. Here is a list of common reasons:
Globalization has increased competition and undermined the financial stability of large employers, making long-term pension obligations more risky.
Employment has fallen in large, hierarchical companies and unionized industries that typically offer defined benefit plans, while employment has increased in high-tech companies and small, non-unionized companies that do not typically offer defined benefit plans.
Plans have become more expensive as workers live longer and declining inflation increases the cost of unindexed lifetime benefits.
The nature of the workforce has changed, becoming more female, more educated, and younger, reducing the attractiveness of lifelong careers.
And, importantly, 401(k) plans became available as soon as the stock market began its 20-year rise.
Langbein disagrees with these fundamental factors and rather places significant weight on the harm caused by ERISA. This bill is designed to protect the rights of defined benefit plan participants so that more people can benefit. It introduced participation and vesting criteria to make it easier for workers to establish legal claims for benefits, and funding and fiduciary criteria to make funds available to pay legal claims. And if a plan is terminated due to insufficient assets, ERISA creates the Pension Benefit Guaranty Corporation (PBGC).
Despite all the good intentions, Langbein concluded that ERISA had made defined benefit plans too burdensome.
At the top of his list are PBGC premiums, which he describes as subsidizing sick plans with taxes on health insurance, creating a major incentive for companies to get out of the defined benefit business.
Second on his list is the accelerated vesting provisions that have lasted five years since 1986. This is restrictive, expensive, and prevents sponsors from using pensions to reduce turnover.
Third, by prohibiting employers from limiting their liability to the assets of the plan, the Financial Accounting Standards Board would require companies to present the impact of the plan (including assets measured in the market) on a company’s income statement and balance sheet.
The last item on Langbein’s list is compliance and litigation costs. This is especially true considering that during the 1980s, Congress passed significant legislation every few years affecting defined benefit plans.
It is certainly true that legislation designed to make pensions fairer has made the pension system more complex and more expensive to administer. The only question is how much ERISA has contributed to the decline of defined benefit plans compared to global economic developments, industrial change, union decline, and changes in workforce composition.
