As a landmark law turns 50, here are five ways to improve retirement security
The Employee Retirement Income Security Act of 1974 set the stage for the modern employer-provided saving system.
The programs that Americans rely on for security in retirement today rest on just a few major legislative acts. The two most important are the laws that created Social Security, Medicare and Medicaid - enacted in 1935 and 1965, respectively. The third is the Employee Retirement Income Security Act, or ERISA, which governs retirement benefits sponsored by private sector employers. ERISA was signed into law on September 2, 1974 by President Gerald R. Ford.
ERISA marks its 50th anniversary this year, and I took that milestone as an opportunity to write about what the law has meant, and ways to improve retirement security. My article appeared over the weekend in The New York Times.
ERISA was a response to several high-profile pension plan failures in the 1950s and early 1960s that left thousands of workers without promised benefits. Several of the failures occurred at companies that are little remembered today, including the defunct carmakers Studebaker and Packard, and Horn & Hardart, which owned the Automat restaurant chain that is well-remembered by older east coast residents. These pension collapses set in motion a drive to make pensions safer, and that ultimately led to ERISA’s passage.
Before we delve into the significance of ERISA, it’s worth noting that President Ford signed the law less than one month after the Watergate scandal forced the resignation of Richard M Nixon on August 9th, 1974. At this moment of inflamed political division and dysfunction in our country, it’s worth reflecting for a moment on the fact that Congress came together to finish the job on ERISA in the wake of the Watergate turbulence.
But I digress.
ERISA protected private sector pensions by imposing funding requirements, rules for employee eligibility and fiduciary standards requiring plan sponsors to act solely in the interest of its participants. It also created the Pension Benefit Guaranty Corporation, the federally sponsored insurance fund that backstops failing pension plans.
But those tighter requirements and costs led many employers to stop offering traditional pensions and to the rise of 401(k) plans and Individual Retirement Accounts and their dominance in the private sector today.
Pensions never did cover all U.S. private sector workers — 62 percent were covered in 1983 compared with a mere 18 percent in 2022. But workers who had them benefited from automatic participation, professional investment management and guaranteed lifetime income streams.
In their place, I.R.A.s and workplace saving plans like 401(k)s have accumulated a staggering $25.4 trillion in assets. But much of that wealth is held by higher income households, and coverage is far from universal. What’s more, there are large gaps in retirement account ownership and participation by race, gender and ethnicity.
For my Times story, I interviewed experts on retirement security policy for their wish list of ways to improve retirement security and make the system more equitable. They suggested five core ideas:
Improve access. The biggest problem with 401(k)s is that not enough workers have them.
Make 401(k)s more like pensions. That means importing features like automatic participation, professional investment management and guaranteed income streams in retirement.
Ensure better I.R.A. advice. Much of the money in I.R.A.s is rolled over from workplace plans, but Individual Retirement Accounts fall outside that rule because they aren’t managed by employers.
Make the system more equitable. The tax-deferral features of 401(k) and I.R.A. accounts are designed to encourage saving. But it’s a benefit bestowed largely on upper-income households. Shifting more of that benefit to lower-income households would spread retirement security in a more balanced way.
Expand Social Security with new sources of revenue. Progressive advocates argue that a substantial expansion of benefits is the only meaningful way to close the retirement income gaps facing low- and middle-income people.
50 years after ERISA, too many members of the retirement planning community are still ignorant of the reasons & rationales behind the options for real-life retirement income planning.
Partly this is because ERISA was passed in 1974 5 years before the first 401k plan existed and 17 before (1991) H. Markowitz revealed his modern portfolio theory (MPT) didn’t address the asset/liability matching problem. Since then new groups of professionals CRC (1999) , RMA (2010) and RICP (2013) have attempted to address this. But there’s an inherent conflict of interest. If a practice is focused on clients who are spending down their assets before dying how does the business grow?
The default style therefore is to suggest clients follow a total return strategy instead of a more flexible and potential safer approach summed up as “Income is the Outcome”