50 years of ERISA

By Doug Bailey

Thanks to a defunct car dubbed the Avanti and an out-of-work auto worker named Lester Fox, nearly 150 million American workers enjoy secure pension funds today.

This year marks the 50th anniversary of the passage of ERISA — the Employee Retirement Income Security Act — which regulates and safeguards workers enrolled in private pension plans. Before 1974, private company pension plans, which date back to the late 19th and early 20th centuries, were informally administered, had little oversight or requirements, had no controls and were targets for corruption.

It took several high-profile pension failures and inadequacies to spur the law that now protects the more than 75% of workers enrolled in company pension plans. That’s where the Avanti and Fox enter the picture.

The Avanti (Italian for “forward”) was a high performance “personal” car manufactured by Studebaker as an answer to Ford’s Thunderbird, or even Chevrolet’s Corvette. It set speed records — with some alterations, it could go up to 170 mph — and the first model in 1962 went to Indianapolis 500 winner Roger Ward.

It was also supposed to be a lifesaver for the financially teetering Studebaker, of South Bend, Ind. But it was not to be. Problems with constructing Avanti’s 130-piece fiberglass body delayed production, and the carmaker’s goal of making 1,000 cars a month fell to fewer than a handful. By the end of 1963, only about 4,800 Avantis had rolled off assembly lines. Dealers canceled orders, prepaid customers demanded refunds, and “America’s Most Advanced Car,” as Studebaker’s heavily broadcast advertisements called it, was seen as a lemon, if it was seen at all.

With it went the company’s fortunes and future. The next year, Studebaker closed its South Bend plant, which was the largest employer in St. Joseph County. Nearly 10,000 people were put out of work, and with their jobs went their company’s pension plan. Only about 3,600 older employees, who were already eligible for full retirement, received their full pension benefits as promised. About 4,000 employees, who were vested in the pension plan but not yet eligible for full benefits, received lump-sum settlements that were a fraction of what they had expected — some just 15 cents on the dollar. And about 3,000 workers, many of whom had toiled for years at the plant but were not yet vested, received no pension, according to congressional testimony.

The Studebaker disaster was the tipping point for advocates calling for government oversight of private pension funds. But it was not the only pension fund collapse notable at the time.

The Central States, Southeast and Southwest Areas Pension Fund, managed by the Teamsters Union; the United Mine Workers Welfare and Retirement Fund; and the Railroad Retirement fund had all come under scrutiny for underfunding, mismanagement and, in some cases, bald-faced corruption.

The cases all created political issues and led to calls for both public and private pension systems overhauls. The clamor for reform from labor leaders, employee advocates, elected officials and policy experts rose to new levels by the early 1970s.

Senator Harrison A. Williams Jr., D-N.J., then chairman of the Senate Labor and Public Welfare Committee, lamented the lack of effective legal control over the administration of pension funds.

“The man who depends on them is helpless if his employer mismanages or underfunds the plan,” he said, calling the situation a national disgrace.

Rep. John Dent, D-Pa., who co-authored the House version of the pension reform bill and was a major voice in bringing attention to pension failures, said the current system at the time was “chaotic” and “unreliable.”

“A pension promise is supposed to be as good as gold, but all too often, it turns out to be fool’s gold,” he said. “We need to change that.”

During congressional hearings, legislators and advocates often cited the case and testimony of Lester Fox, a Studebaker employee who was left with $377 in pension money after working there for more than 20 years.

After the factory closed, Fox became president of Project ABLE (Ability Based on Long Experience), an organization created to help older employees displaced by Studebaker’s shutdown. He beat a path up the U.S. Capitol steps retelling his own story and testifying on behalf of workers who had lost their pension in the Studebaker debacle. He was a key figure in pushing for pension reform.

Fox told members of the Subcommittee on Labor of the Committee on Labor and Public Welfare that more than “4,000 workers who had a promise of a private pension plan witnessed it vanishing before their very eyes. That was a decision made by the employer. The employees had absolutely no voice in the decision to terminate the operation. This was purely a management decision.”

Not everyone, however, was keen on the government getting into the business of regulating private pension funds. The U.S. Chamber of Commerce, the National Association of Manufacturers, the Teamsters Union, small business groups, and some legislators, mostly pro-business Republicans, opposed the measure, voicing cost concerns and warnings of federal overreach, and potential negative impact on businesses and the economy.

Sen. Barry Goldwater, R-Ariz., was a vocal critic of ERISA. He believed that the legislation was an unacceptable level of federal interference in private business. Pension management should be a private matter between employers and employees, he said, free from heavy-handed government regulation.

Eventually, enough bipartisan support coalesced and resulted in the passage of the ERISA bill that was signed by then-President Gerald Ford on Sept. 2, 1974. It established minimum standards for pension plans, improved transparency and created the Pension Benefit Guaranty Corp. to protect workers’ pensions in case of plan failure.

Ford emphasized that the law was designed to ensure that workers who contributed to pension plans would be guaranteed the benefits they were promised.

“In the past, far too many employees who worked for many years only to find that their pension funds had gone broke or that they had not vested in the plan,” Ford said at the signing. “Today, that has been corrected.”

A key mechanism in ERISA is the five-part test that defines whether an advisor is a fiduciary, ensuring that investment advice is given with the retirement plan’s best interest in mind.

To be considered a fiduciary under the five-part test, all five of the following conditions must be met:

1. The person must give advice or make recommendations about the value of securities or other property or provide advice about the purchase or sale of securities or other property within a retirement plan.

2. The advice must be given on a regular basis, rather than on a one-time or infrequent basis.

3. There must be a mutual understanding or agreement between the advisor and the plan sponsor or the plan participants that the advice will serve as a primary basis for investment decisions.

4. The advice provided must be intended to be relied upon as a primary factor when making investment decisions about the retirement plan.

5. The advice must be tailored to the specific needs of the plan or the participants involved.

ERISA brought huge changes at the time. Provisions we take for granted are only 50 years old.

“People may think the vesting and coverage acts have always been in the law,” said Fred Reish, a partner at Faegre Drinker Biddle & Reath LLP, in Los Angeles. “Of course, 50 years is a long time.”

But some provisions still seem new and are evolving, Reish said.

“The best example of that is fiduciary responsibility,” he said. “That is because the fiduciary standard of prudence is principles based, unlike Internal Revenue Code provisions, which are rules based. Rules can be static; principles adapt to changing times.”

But even the rules-based provisions have changed through legislation, including The Revenue Act of 1978, which produced Section 401(k); the Pension Protection Act of 2006, which confirmed automatic enrollment and introduced QDIAs — qualified default investment alternatives — and the SECURE 2.0 Act, which mandated automatic enrollment and deferral increases for 401(k) and private sector 403(b) plans adopted on or after Dec. 29, 2022.

The Department of Labor has revisited the five-part test multiple times over the years, including with notions to expand the definition of a fiduciary. The interpretation of the test has evolved, mostly involving retirement advisors, broker-dealers, and financial professionals who give investment advice to individual retirement accounts and pension plans. Attempts to update or replace the five-part test, particularly under the DOL’s fiduciary rule, have sparked debate and litigation within the financial services industry.

Today, the DOL is in court fighting to save its retirement security rule. Many of the same opponents of ERISA are again lined up against this expansion of fiduciary duty. Part 2 of the series will examine the retirement security rule fight in greater detail.