This Labor Day marks 50 years since the Employee Retirement Income Security Act of 1974 (ERISA) was signed into law by President Gerald Ford. The law passed in the House of Representatives 407 to 2 and in the Senate 85 to 0.
The retirement landscape is significantly different now than it was when ERISA first became law. To begin with, it was the traditional defined benefit pension plan that dominated the scene. Today, most plans that are available to active employees of American companies and organizations are defined contribution plans like 401(k)s and 403(b)s. But there were also substantial differences in plan design and retirement security. The passage of ERISA was a win for American workers. In celebrating ERISAs 50th, we thought it would be worthwhile to look at some of the changes that the law brought about.
Plan Design Before ERISA
The Bureau of Labor Statistics (BLS) has tracked information on retirement plans and other employer benefits for over a century. BLS conducted a study the year that ERISA became law, taking a representative sample of defined benefit plans covering more than 100 employees. The following are some examples of the types of provisions some plans had and how they would violate ERISA today (note that the requirements have shifted over the years as the law has been repeatedly amended).
• Requiring employees to work for 2 years or reach age 25 before joining the Plan. ERISA currently limits these requirements to 1 year of service and a maximum of 21 years of age.
• In some plans if an employee left before retirement they would forfeit their entire benefit, regardless of years of service. Today, ERISA requires defined benefit plans to vest employees after 5 years (cliff vesting) or have a graded vesting schedule between 3 and 7 years long (defined contribution plans must meet a maximum 6-year graded vesting requirement).
• Plans that did have vesting schedules often had onerous ones, requiring in some cases that employees reach 40 years of age and/or work 15 years or more.
• Some plans did not provide benefits to surviving spouses. Today, ERISA requires a joint-and-survivor annuity to retiring employees unless the annuity is properly waived.
Retirement Security Before ERISA
Since ERISA became law in 1974, you may be wondering why this post features a photograph of an early 1960s station wagon—a Studebaker. It turns out that the roots of pension reform stretch back into the 1960s.
The Department of Labor (DOL) published a timeline around ERISA’s 40th anniversary that explained some of the key developments that led to the pension reform contained in ERISA. One of these developments was the establishment of the President’s Committee on Corporate Pension Plans under John F. Kennedy in 1961. But James A. Wooten, a professor and expert on pension law at the University of Buffalo School of Law, wrote in a 2001 article in the Buffalo Law Review that “[n]o single event is more closely associated with ERISA than the shutdown of the Studebaker plant in South Bend, Indiana.”
Studebaker employees received an unwanted present around Christmas in 1963 when Studebaker closed its South Bend plant and subsequently terminated the retirement plan it had sponsored for hourly workers. The plan then defaulted on its obligations. In the end, only those workers who had already reached retirement age received their full pension benefits. The majority of workers received either pennies-on-the-dollar compared to the actuarial value of their benefits prior to termination, or nothing at all. Thus, among the major reforms introduced by ERISA were the establishment of the Pension Benefit Guaranty Corporation and minimum funding requirements for pension plans.
ERISA Still A Win For American Workers
In addition to the benefits we’ve noted above, ERISA has improved reporting and disclosure around retirement plans, including around fees and expenses, set down requirements for fiduciary oversight of employees’ retirement funds, and placed retirement plans under federal oversight. This federal oversight has been carried out under the DOL’s Employee Benefits Security Administration (EBSA). EBSA oversees 765,000 private retirement plans and 619,000 other welfare benefit plans covering more than 150 million Americans. Enforcement action in 2023 alone recovered nearly a billion dollars for benefit plans, participants, and their beneficiaries. This involved nearly 200 criminal investigations and 77 guilty pleas, a fact that underscores the ongoing need for the law. 50 years, ERISA is still a win for American workers.
