What’s next for retirement income security?

By Doug Bailey

When President Gerald Ford signed the Employee Retirement Income Security Act of 1974, it marked a revolutionary overhaul of employer-sponsored retirement plans. Before ERISA, employers and unions decided how employee benefit plans were designed and run. There were no minimum standards, leading to serious abuses and corruption. ERISA federalized private pension plans and made worker security a top congressional priority.

But rather than bringing an end to the issue, ERISA, which turned 50 in 2024, was really the beginning of an evolutionary era of worker retirement plans. Consider: Employee retirement plans then existed in a defined benefit world, which guaranteed employees a specific payout in retirement. Now it is a defined contribution world, where employees can choose retirement investment options. There were no 401(k) plans, profit-sharing plans or individual retirement accounts; there were no health and welfare benefits plans, like COBRA and the Affordable Care Act, all of which popped up after ERISA was made law.

In 2006, the Pension Protection Act brought automatic enrollment provisions, allowing employers to automatically enroll employees into retirement plans. The PPA also established guidelines for default investment options like target-date funds, which became a popular choice for employers to meet their fiduciary responsibilities.

In addition, fee disclosure rules and other transparency provisions, as well as cybersecurity regulations, have all been added to the original ERISA, making it one of the most dense, involved and complex pieces of legislation ever enacted. An ERISA “outline” book published by the American Society of Enrolled Actuaries is nine volumes totaling nearly 10,000 pages.

All ‘very hazy’

“Even by the mid-80s, people still were struggling with figuring out what ERISA meant and how it worked and what the issues were,” said Jay Kirschbaum, director of benefits compliance at World Insurance, Iselin, N.J. “It was all very hazy in a lot of ways.”

And that was before the huge expansion of add-on regulations.

Kirschbaum’s specialty is health and welfare plan compliance, which did not exist until the late 1990s.

“The passage of COBRA accelerated the need for more knowledge and information about health and welfare plans,” he said. “But compliance issues with health and welfare plans weren’t even on anybody’s radar, primarily because back then, most medical plans were fully insured medical plans, and they were regulated by the states. And, so, there wasn’t a lot of ERISA application generally.”

But things change. One of the most recent and significant changes still up for debate was the U.S. Department of Labor’s fiduciary rule, which expanded the definition of who is considered a fiduciary under ERISA. The original rule was narrow, only applying to those directly managing a plan’s assets. A new fiduciary rule, published in 2016, extended fiduciary duty to advisors selling financial products with retirement plan dollars. A judge tossed out the rule in 2018. Another version of the fiduciary rule, known as the Retirement Security Rule, was introduced this year and is the subject of several lawsuits.

A line of challenges

The Federation of Americans for Consumer Choice v. Department of Labor case was the first case challenging the DOL’s 2024 fiduciary rule. It was followed by American Council of Life Insurers v. Department of Labor, filed by nine insurance trade associations. The plaintiffs in both cases filed in federal district courts in the Fifth Circuit and contended that the 2024 fiduciary rule exceeded the DOL’s authority and flew in the face of a Fifth Circuit ruling in Chamber of Commerce v. Department of Labor, which rejected an earlier version of the fiduciary rule finalized in 2016.

“It’s complicated because this fiduciary definition is all tied in with the prohibited transaction rules in ERISA, and the implementation of the prohibited transaction rules created a huge brouhaha,” said James Wooten, law professor at University at Buffalo School of Law and author of The Employee Retirement Income Security Act of 1974: A Political History. “It is really a nightmare for the Department of Labor and the IRS to deal with.”

Wooten said transaction rules that allowed the DOL to create administrative exemptions would now seem to fall within the scope of the prohibited transactions exemptions.

“There’s huge pressure on the DOL and the IRS to create these prohibited transaction exemptions,” he said. “But you know, they’re also trying to staff up, because there’s this huge new regulatory regime and they need people to do this. And so, it’s just kind of a nightmare.”

In addition to the legal challenges against the 2024 fiduciary rule, officials say there are also partisan splits over the rule that are reminiscent of the fight over ERISA that erupted in the 1970s before Ford signed the bill.

“The other people in favor of the rule are people who are already fiduciaries, who take their fiduciary status very seriously and are operating at a competitive disadvantage because they have to put their clients’ interests first,” said Norman Stein, senior policy counsel and acting legal director for the Pension Rights Center, a Washington nonprofit organization that protects and promotes retirement security. “And no matter what they say about other laws that regulate investments, they are not subject to the Department of Labor rules and are not as strong, and in some cases, particularly in the insurance sphere, not quite a joke, but they’re not very demanding.”

Insurers speak out

Insurers, as well as brokerages and financial advisors, say the new DOL rule would increase costs and might make it more difficult to sell annuities and other retirement planning insurance products. Insurers also argue that the fiduciary rule limits choices for retirees.

“I personally think that straight-life annuities, things that are not fixed-index annuities, or variable annuities, are very useful products and benefit a lot of people,” Stein said. “The more complicated instruments, to be honest, are hard to understand, and I wonder sometimes if the people selling them really understand them.”

Stein and other pension advocates say the filing of the lawsuits in the Fifth Circuit was a “tell” due to that court’s overwhelmingly pro-business decisions.

“The Fifth Circuit, when it suggested the Department of Labor basically had no business interpreting provisions of the Internal Revenue Code, was just so dead wrong,” said Stein. “It’s laughable. I mean, it’s stuff a fourth-grader who took an introductory law class would get right.”

Stein and others believe the DOL will eventually prevail in the challenges to its fiduciary rules.

“I’m a historian, and what I did was go back and look at all of the legislative rigmarole that happened getting ERISA passed and how that provision for investment advice definition got into the statute,” said Prof. Wooten. “And so, I think based on what we know, the DOL wins.”

Meanwhile, experts predict there will be more efforts to expand ERISA in the coming years, perhaps to make it applicable to government retirement plans; traditional, Roth and SEP IRAs; and benefits that are now offered solely for complying with workers’ compensation, unemployment or disability laws.

“If I were emperor, I would expand a lot of what ERISA does to all those other things,” said Kirschbaum. “I would give more leeway to employers and give them an opportunity to have more flexibility in their plan designs.”

Kirschbaum, however, does not expect to see that happen.

“That’s not the way the world is going,” he said. “It’s going the opposite way, where we’re going to mandate and tell you exactly what you can and cannot do.”