The genesis of ERISA
The decades before the enactment of the Employee Retirement Income Security Act (ERISA) in 1974 were not a blank slate. U.S. tax law already provided favorable tax treatment for contributions to qualified pension and profit sharing plans, and pension trusts were required to be irrevocable so employers could not take a reversion of funds to be used for other purposes. But funding and reporting requirements were notably weak.
These weaknesses came into the public view as a result of the infamous shut down of Studebaker's plant in South Bend, Indiana, and the resulting collapse of their pension plan in 1963. This was followed closely by the Central States Pension Fund fraud case involving Jimmy Hoffa in 1967. These events underscored the need for federal oversight to protect employee benefits and catalyzed bipartisan support for legislation. It still took about a decade for ERISA to become law, but it ultimately did on Labor Day of 1974. ERISA's primary aim was to establish federal funding standards for pension plans, set fiduciary standards for plan management, and enforce reporting and disclosure requirements to safeguard employee benefits.
Transformative impact on benefit plans
ERISA fundamentally transformed the landscape of employee benefit plans by introducing stringent federal standards that enhanced transparency, accountability and security. This legislation spurred the growth of diverse retirement and health benefit plans, including the rise of 401(k) plans and Individual Retirement Accounts (IRAs), which provided individuals with greater flexibility and control over their retirement savings. Additionally, ERISA's coverage of employer health and welfare benefit plans gradually increased as COBRA and HIPAA came into the law, and we saw the rise of individual savings accounts for health care, including health reimbursement accounts, flexible spending accounts, and ultimately health savings accounts. These developments were capped off by the groundbreaking Affordable Care Act (ACA) passed in 2010.
The role of benefits advisors/brokers
The number of ERISA-covered plans sponsored by employers has grown astronomically over the years to over 734,000 plans in existence today, covering 153 million active participants, and holding $12.8 trillion in assets. With such high stakes for employer sponsors, benefits advisors and brokers have played a crucial role in navigating the complexities of ERISA's administrative and fiduciary compliance standards and helping employers design and manage benefit plans that meet federal standards. Their expertise has been vital in ensuring that plans are not only compliant, but also optimized for the needs of employees. Advisors and brokers have also been instrumental in educating employers about the importance of fiduciary responsibilities and the potential liabilities associated with plan administration.
Adapting to ongoing and future changes
As the demographic landscape shifts with an aging population, there is an increasing need for sustainable income streams for both general retirement income, as well as health care expenses and intergenerational financial planning. Technological advancements, particularly in AI and machine learning, are revolutionizing retirement planning by making sophisticated strategies more accessible. Benefits advisors and brokers must stay abreast of these changes to provide the best possible advice to their clients. Additionally, potential legislative reforms aimed at enhancing retirement security, such as changes to Social Security and new regulations to protect against financial exploitation and cybercrime, will require advisors to continuously update their knowledge and strategies.
Current ERISA claims and liabilities
Recent litigation trends highlight the ongoing challenges faced by plan administrators and employers. New cases involving use of forfeiture accounts, pension risk transfers, and alleged prohibited transactions have emerged, alongside established claims related to excessive fees, breaches of fiduciary duty, improper denial of benefits, and failure to provide required disclosures. Developing issues such as exposure to ESG, the scope of the fiduciary rule, and cybersecurity risk appear to be a current focus. Benefits advisors and brokers must help their clients administer their programs to best navigate these risks and ensure ERISA compliance to minimize potential liabilities.
Reflecting on ERISA's 50th anniversary
ERISA's 50th anniversary marks a significant milestone in the evolution of employee benefits. The act has profoundly impacted the industry by establishing principles of transparency, accountability, and fiduciary responsibility. It has adapted to shifts from defined benefit to defined contribution plans and responded to health care reforms. However, ongoing challenges remain, given the proliferation of ERISA litigation and concerns over the scope of ERISA preemption. ERISA must remain as flexible over the next 50 years and evolve to address these developing areas. Potential changes could include the continued expansion of access to retirement savings, increasing fee transparency, clarification of ERISA preemption of state and local laws, and cybersecurity risks.
The future of benefits advisory
As we celebrate 50 years of ERISA, it is clear that the role of benefits advisors and brokers is more critical than ever. They must continue to adapt to technological advancements, legislative changes, and responding to evolving client needs. By staying informed and proactive, advisors and brokers can help ensure that employee benefit plans remain robust, compliant, and beneficial for all stakeholders. This anniversary is not just a time to reflect on past achievements but also to look forward to the future of employee benefits and the ongoing role of advisors in shaping that future.
Originally published by ALM BenefitsPro.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.