Third in a series on ERISA at 50
The Employee Retirement Income Security Act known as ERISA, which officially marks its 50th anniversary next month, has been a key law governing American retirement policy since 1974. It ensures fiduciary responsibility, transparency and
Despite these achievements, the framework ERISA created faces significant challenges. Changes to tax policy could undermine the incentives crucial for retirement savings. Additionally, a mounting wave of litigation threatens the operational integrity and financial sustainability of ERISA plans and the tens of millions of workers they serve. Finally, regulatory and legal pendulum swings may undermine the stability that characterizes this landmark law.
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As ERISA enters its sixth decade, policymakers need to overcome these potential obstacles to preserve the law's effectiveness in
Challenge 1: Reducing or eliminating incentives will reduce retirement savings
Private retirement vehicles have allowed workers to develop additional retirement savings outside of Social Security that can supplement their long-term needs. Employer-provided retirement plans provide the backbone of retirement savings for tens of millions of Americans. In the private sector, defined contribution plans like 401(k)s have proven popular for decades. In fact, government data shows Americans hold $8.1 trillion in those plans and another $11.5 trillion is held in Individual Retirement Accounts (IRAs).
The most significant changes to retirement policy in a generation were achieved by passing the SECURE Act in 2019 and SECURE 2.0 Act in 2022. The reforms encouraged small businesses to pool together to create retirement plans, increased catch-up contributions and delayed required distributions. They also led to in-plan emergency savings accounts and enabled employers to make matching contributions to retirement plans based on an employee's qualified student loan payments, among dozens of other meaningful changes.
While implementation of the SECURE laws is still in progress, these retirement vehicles have enabled ERISA plan sponsors to invest in their employees' financial wellness.
Despite successfully helping individuals save for the future, some want to change the tax treatment of these retirement tools. Limiting current tax preferences to pay for entitlements or other government spending, or further capping the amount that can be saved on a tax-deferred basis are disastrous ideas.
Advocates suggest redistributing these resources would be beneficial to middle and lower-income Americans. This ignores the very real truth that savings in 401(k)s are often the bulk of a middle-class family's savings. A fundamental law is that eliminating incentives generally yields less of that activity. Those who claim there is a retirement savings problem should recognize that limiting savings for current and future workers is a mistake.
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Challenge 2: Litigation risk makes retirement benefits costlier and less appealing
ERISA protects workers and retirees from unscrupulous bad actors, but the class-action plaintiffs' bar threatens a counterproductive extreme. Plaintiffs have manufactured lawsuits nitpicking nearly every aspect of plan administration: service provider fees, investment menu construction and liability management just to name a few. While some claims have merit, many do not. All are costly to defend, and employers often settle to avoid protracted, expensive litigation.
This is a collective action problem where one issue compounds upon another. Nuisance settlements may make financial sense in individual cases, but they create perverse, industry-wide incentives to keep generating these lawsuits. Courts have acknowledged the risks of these suits and require plaintiffs to allege legal failures plausibly, yet the suits continue to proliferate.
A recent complaint argued that every benefit plan contract renewal was presumptively prohibited by law, with companies unable to rebut this presumption until later in the litigation. ERIC and other trade groups have asked the Supreme Court to review this case (Bugielski et al v. AT&T) because opening the door for the plaintiffs' bar to pursue potentially frivolous and costly litigation has real consequences. Employers are less likely to offer or keep plans, and employees are likely to bear the costs of defending these suits and higher fiduciary insurance premiums.
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Challenge 3: Regulatory uncertainty threatens stability
Whether you are a tax lawyer or a taxidermist, businesses thrive when the rules are certain and stable. Both the upcoming election and recent Supreme Court decision in Loper Bright Enterprises v. Raimondo to drastically reduce judicial deference to administrative agencies will have far-reaching implications for regulations governing employee benefit plans.
Plan design and administration depends on businesses, workers and plan service providers knowing the rules. Sweeping changes to longstanding regulations have immediate consequences and introduce uncertainty. Those changes could take the form of a policy shift after an election or lawsuit challenging a regulation. The high court's historic decision will be debated for years, but some practitioners are already noting immediate effects on retirement policy. The decision could affect legal challenges to the Department of Labor's rules affecting investment advice and fiduciary obligations, for instance.
Practitioners are also evaluating how agencies will react. Will they take more cautious policy positions? Will they rely less on rulemaking and more on audits and enforcement as a policymaking proxy, a complaint that some have already raised? Finally, how "settled" will settled case law really be? When the rules are constantly in flux, long-term planning is difficult or impossible.
Answering these questions will take time. The lack of certainty facing ERISA plan sponsors could complicate plans' ability to operate efficiently.
As ERISA celebrates a half century, its supporters must address three key challenges: potential tax changes that could weaken retirement savings incentives, increasing litigation risks and uncertainty about future regulations. Instead, policymakers should focus their efforts to maintain ERISA's integrity and its role in protecting retirement benefits for future generations.
