Overcoming Challenges to Protect ERISA, America’s Retirement Security

Third in a series on ERISA at 50

The Employee Retirement Income Security Act, known as ERISA, which officially celebrates its 50th anniversary next month, is a key law that has governed U.S. retirement policy since 1974. It ensures fiduciary accountability, transparency and responsibility IN employer-sponsored retirement plans to protect the interests of employees.

Despite these achievements, the framework created by ERISA faces significant challenges. Changes in tax policy could undermine incentives that are key to retirement savings. In addition, a growing wave of litigation threatens the operational integrity and financial stability of ERISA plans and the tens of millions of workers they serve. Finally, swings in the regulatory and legal pendulum could undermine the stability that has characterized this landmark law.

Read more: Growing Attacks on ERISA Precedence Threatens Benefit Uniformity

As ERISA enters its sixth decade, policymakers must overcome these potential obstacles to maintain the law’s effectiveness. protecting and promoting retirement securityHere’s how these key issues play out:

Challenge 1: Reducing or Eliminating Incentives Will Reduce Retirement Savings
Private pension funds have allowed workers to build additional retirement savings beyond Social Security that can supplement their long-term needs. Employer-provided pension plans are the backbone of retirement savings for tens of millions of Americans. In the private sector, defined contribution plans, such as 401(k)s, have been popular for decades. In fact, government data shows that Americans have $8.1 trillion in these plans, with another $11.5 trillion held in individual retirement accounts (IRAs).

The most significant changes to retirement policy in a generation were achieved through the passage of the SECURE Act in 2019 and the SECURE 2.0 Act in 2022. The reforms encouraged small businesses to join together to create retirement plans, increased matching contributions and delayed required distributions. They also created emergency savings accounts within the plan and allowed employers to make matching contributions to retirement plans based on an employee’s qualified student loan repayments, among dozens of other significant changes.

Although implementation of the SECURE regulations is still pending, these retirement vehicles have enabled ERISA plan sponsors to invest in the financial health of their employees.

Despite their effective help in helping people save for the future, some want to change the tax treatment of these retirement vehicles. Reducing current tax preferences to cover debts or other government expenses, or further limiting the amount that can be saved on a tax-deferred basis, are disastrous ideas.

Proponents suggest that redistributing these resources would benefit middle- and low-income Americans. This ignores the very real truth that 401(k) savings often make up the bulk of a middle-class family’s savings. The basic law is that eliminating incentives generally brings less of this activity. Those who argue that there is a problem with retirement savings should realize that restricting savings for current and future workers is a mistake.

Read more: Proposed change to regulations threatens access to mental health care

Challenge 2: Litigation risk makes retirement benefits more expensive and less attractive
ERISA protects employees and retirees from dishonest crooks, but the attorney general’s class action threatens to go to a counterproductive extreme. Plaintiffs have manufactured lawsuits that target nearly every aspect of plan administration: provider fees, investment menu design, and liability management, to name a few. While some claims are valid, many are not. All are expensive to defend, and employers often settle to avoid protracted, costly lawsuits.

It’s a collective action problem, where one problem builds on another. Nuisance settlements may make financial sense in individual cases, but they create perverse industry incentives to keep generating these lawsuits. Courts have recognized the risks of these lawsuits and require plaintiffs to credibly allege legal wrongdoing, and yet the lawsuits continue to pile up.

The recent complaint argued that any renewal of a benefit plan contract was presumptively barred by law, and the companies could not rebut that presumption until later in the proceedings. ERIC and other trade groups asked the Supreme Court to hear the case (Bugielski et al. v. AT&T) because opening the door to plaintiffs’ bars to pursue potentially frivolous and expensive lawsuits has real consequences. Employers are less likely to offer or maintain plans, and employees are likely to face the costs of defending against these lawsuits and higher premiums for fiduciary insurance.

Read more: ERISA is 50: What will the next 50 years bring?

Challenge 3: Regulatory uncertainty threatens stability
Whether you’re a tax lawyer or a taxidermist, businesses thrive when the rules are certain and stable. Both the upcoming election and the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo Radically limiting the submissiveness of courts towards administrative bodies will have far-reaching consequences for the regulations governing employee benefit plans.

Plan design and administration depend on companies, employees and plan service providers understanding the rules. Radical changes to long-standing rules have immediate consequences and introduce uncertainty. Those changes could take the form of a policy change after an election or a lawsuit challenging the rules. The historic high court decision will be debated for years, but some practitioners are already seeing immediate implications for retirement policy. The decision could affect legal challenges to the Department of Labor’s rules on investment advice and fiduciary obligations, for example.

Practitioners are also assessing how agencies will respond. Will they adopt more cautious policy positions? Will they rely less on rulemaking and more on audits and enforcement as a proxy for decision-making, as some have already raised? Finally, how “settled” will the settled case law really be? When rules are in flux, long-term planning is difficult or impossible.

Answering these questions will take time. The uncertainty facing ERISA plan sponsors can complicate plans’ ability to operate effectively.

As ERISA celebrates its sesquicentennial, its advocates must address three key challenges: potential tax changes that could weaken incentives to save for retirement, the growing risk of litigation, and uncertainty about future regulations. Instead, policymakers should focus their efforts on maintaining the integrity of ERISA and its role in protecting retirement benefits for future generations.