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Employee Retirement Income Security Act of 1974

Employee Retirement Income Security Act of 1974

James A. Wooten


Excerpt from the Employee Retirement Income Security Act of 1974

It is hereby ... declared to be the policy of this Act to protect interstate commerce, the Federal taxing power, and the interests of participants in private pension plans and their beneficiaries by improving the equitable character and the soundness of such plans by requiring them to vest the accrued benefits of employees with significant periods of service, to meet minimum standards of funding, and by requiring plan termination insurance.


The Employee Retirement Income Security Act of 1974 (P.L. 93-406, 88 Stat. 829), commonly known as ERISA, is the principal federal law regulating employee-benefit plans in the private sector. There are two general types of employee-benefit plans: 1) pension plans are arrangements for providing retirement income; 2) welfare plans include arrangements for providing benefits such as health, life, and disability insurance and severance pay. Because the legislators who drafted ERISA were primarily concerned with protecting employees who lost retirement benefits, they established detailed regulations for pension plans. They paid much less attention to welfare plans.

HISTORY OF PENSION AND HEALTH PLANS

Although some employers provided pensions or medical benefits as early as the 1880s, only a small minority of private-sector workers was covered by a pension or health plan in 1940. During World War II the number of pension and health plans rose dramatically. One reason was federal tax policy. The income tax gave (and continues to give) more favorable treatment to employer-financed retirement and health benefits than to wages. Rates of taxation were high during the war, so employees could significantly reduce their income tax by substituting a pension or health plan for cash compensation. Also, the federal government froze wages during the war but exempted employer-financed pensions and medical insurance from the freeze. Many businesses adopted a pension or health plan as a means of increasing employee compensation. Shortly after the war, labor unions began demanding pensions and health insurance for their members. By 1965 almost half of private-sector employees were covered by a pension plan and more than 70 percent of government and private-sector employees were covered by a health-insurance plan.

Government oversight of employee-benefit plans was relatively limited in the 1940s and 1950s. Federal law aimed to prevent the use of pension plans for tax avoidance and to ensure that funds held by pension and welfare plans were used to benefit employees, rather than the firm or union that managed the plan. Otherwise, there was little federal or state regulation of employee-benefit plans. In the mid-1950s, government investigations exposed lurid cases in which union officials, sometimes in league with insurance agents or brokers, misused or stole funds from welfare plans. Congress responded by passing the first federal law exclusively concerned with employee-benefit plans, the Welfare and Pension Plans Disclosure Act of 1958. The Disclosure Act required plan managers to publish information so that employees, unions, and the press could monitor employee-benefit plans.

Although the press and public paid the most attention to cases in which funds were wasted or stolen, employees were also threatened by less sensational risks. Many plans did not give employees a legal right to a pension until they had worked for a firm for many years or attained a specific age. Workers who quit or were laid off before they vested (that is, by satisfying service or age requirements) would not receive a pension. Another danger was that a pension plan would not have enough money to pay the benefits it promised. The most famous case of this sort occurred when the Studebaker Corporation closed a plant in South Bend, Indiana, in 1963. Older employees and retirees received their full pension, but workers under age 60 received payments worth only a fraction of the pension they expected or nothing at all.

LEGISLATIVE DEBATES AND THE ADOPTION OF ERISA

By the early 1960s pension experts were debating whether Congress should pass additional regulations to protect employees. In March 1962 John F. Kennedy established the President's Committee on Corporate Pension Funds to study private-pension plans and recommend reforms. The committee's report, which appeared in January 1965, called for a major expansion of federal oversight of private-pension plans.

Titled Public Policy and Private Pension Programs, the report argued that the federal government should regulate pension plans to ensure that employees actually received the benefits their plan promised. The committee urged Congress to pass 1) minimum vesting standards, which would prevent plans from making the requirements for receiving benefits too strict, and 2) minimum funding standards, which would require firms to set aside resources so that pension plans would be more likely to meet their obligations. Several months before the committee's report appeared, Democratic Senator Vance Hartke of Indiana proposed another major reform. In August 1964 Hartke, whose constituents included workers at Studebaker, introduced legislation to create a government-run insurance program that would pay retirement benefits if a plan could not do so.

The reforms proposed by the committee and Hartke were very controversial. Business groups and most labor unions opposed minimum vesting and funding standards. If Congress created uniform federal standards, they claimed, managers and union officials would not be able to adapt pension plans to the needs of particular firms. This might lead employers to abandon their pension plan or to not create a plan in the first place. Most labor unions favored an insurance program for private pensions, but the business community vehemently rejected the idea. Business representatives said there was little need for such insurance because most firms set aside enough funds to pay future pension obligations.

Despite opposition from business and organized labor, reform initiatives advanced during the presidency of Lyndon Johnson. In February 1967 Johnson proposed legislation that aimed to prevent theft or misuse of plan funds by creating standards of conduct for officials who managed employee-benefit plans. Later that month, Senator Jacob Javits, a Republican from New York, introduced a much broader bill that included vesting and funding standards and an insurance program as well as rules of conduct for plan managers.

In May 1968 the Department of Labor proposed a bill with vesting and funding standards and an insurance scheme. In light of the strong opposition of business groups and many labor unions, it seemed unlikely that Congress would approve the vesting, funding, and insurance proposals. What is more, Richard Nixon's election in November 1968 brought to power an administration that was not sympathetic to sweeping new regulation of pension plans. Recognizing these political realities, Senator Javits set out to bring the press and public opinion into the campaign for pension reform.

In spring 1970 Javits persuaded New Jersey's Senator Harrison Williams, a Democrat and chair of the Senate Committee on Labor and Public Welfare, to conduct a survey of pension plans. The survey was designed to present a bleak picture. In March 1971 Javits and Williams released figures that did just that. In Javits's words, the study revealed that "only a relative handful" of employees would receive benefits from their pension plan. Pension experts denounced Javits and Williams's data, but the statistics received wide coverage in the press.

The Senate Labor Committee followed up on the survey with hearings highlighting "horror stories" of workers who failed to receive a pension because they changed or lost their job or because their plan could not pay. Although the hearings were successful in creating broad support for pension reform, interest groups and the president continued to oppose key reforms. When the Labor Committee reported a bill for consideration by the full Senate in September 1972, Russell Long, a Democrat from Louisiana who chaired the Senate Committee on Finance, killed the bill, reportedly at the urging of the president and the business community.

In the spring of 1973, the business community abruptly reversed course and endorsed federal regulation when several state legislatures began considering pension reform. If the states regulated pension plans, then plans that operated in more than one state might have to comply with different laws in different states. Employers and labor unions preferred federal regulation because Congress could establish uniform national rules. In September 1973 the Senate passed a comprehensive pension-reform bill. The House of Representatives followed suit in February 1974. President Gerald Ford signed ERISA on September 2, Labor Day. The law created a comprehensive regulatory program, including disclosure requirements, rules of conduct for plan managers, vesting and funding standards, and a pension-insurance program, to protect workers who depended on private-pension plans. ERISA created few rules or standards for welfare plans but greatly limited the authority of state governments to regulate these plans.

A COMPLICATED REGULATORY PROGRAM

ERISA was a long and complex law, and Congress has passed numerous amendments to it. Some revisions aim to help ERISA better perform its protective function. For example, when it became clear that the insurance program had serious flaws, Congress required employers to make larger pension contributions and limited the circumstances in which an employer could shut down a pension plan. Lawmakers also revised ERISA's vesting standards to protect spouses of employees and to require plans to vest employees more rapidly.

The 1980s and 1990s also brought a major shift in the makeup of the private-pension system. Broadly speaking, there are two types of pension plans: 1) In a defined-benefit plan, employees generally receive regular pension payments after they retire. The payments are calculated according to a benefit formula in the plan. 2) In a defined-contribution plan, each employee has an account much like an account in a savings bank. The employee's retirement benefit is the balance of the account.

For most of the twentieth century, defined-benefit plans dominated the private-pension system. In the 1980s and 1990s, defined-contribution plans assumed an increasingly important role. By the mid-1990s, the number of employees in defined-contribution plans exceeded the number of employees in defined-benefit plans. This shift raises new regulatory issues because ERISA does not deal as extensively with risks that threaten employees in defined-contribution plans. For example, in a defined-contribution plan, an employee's retirement benefit depends on the performance of the investments in his or her account. If the investments do badly, the employee will have less money to spend in retirement. (In a defined-benefit plan, by contrast, an employee's pension depends on the benefit formula, rather than the performance of the plan's investments.) The Enron collapse in 2001 vividly demonstrated that employees may suffer ruinous losses if they invest defined-contribution plan funds in their employer's stock.

See also: Civil War Pensions.

BIBLIOGRAPHY

Gordon, Michael S. "Overview: Why ERISA was Enacted?" in U.S. Senate Committee on Aging, An Information Paper on The Employee Retirement Income Security Act of 1974: The First Decade, 98th Cong., 2nd sess., 1984, Committee Print.

Hacker, Jacob S. The Divided Welfare State: The Battle over Public and Private Social Benefits in the United States. Cambridge: Cambridge University Press, 2002.

President's Committee on Corporate Pension Funds and Other Private Retirement and Welfare Programs. Public Policy and Private Pension Programs: A Report to the President on Private Employee Retirement Plans. Washington, DC: U.S. Government Printing Office, 1965.

Sass, Steven A. The Promise of Private Pensions. Cambridge: Harvard University Press, 1997.

Scofea, Laura A. "The Development and Growth of Employer-Provided Health Insurance." Monthly Labor Review 117, no. 3 (1994): 310.

Insuring Pension Plans

The income tax structure in the United States makes employer-financed retirement and health plans attractive options for employees from a tax viewpoint. This is because, unlike wages, employees do not have to pay taxes on money that an employer contributes to a retirement fund until many years (or even decades) after that money was contributed. Health benefits are even more favorable, as the employee never pays taxes on those benefits.

Insurance programs are a controversial part of pension plans. Labor unions and workers prefer that plans have an insurance program, while business leaders tend to oppose insurance. Insurance programs work this way: when a program is put in place, the pension plan is required to pay a tax. If at some point the plan is shut down without sufficient funds to pay the retirement benefits it promised to pay to vested employees, the insurance program would use the funds generated by the tax to pay those employees the pension they were expecting.

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Javits, Jacob Koppel

Jacob Koppel Javits, 1904–86, American political leader, b. New York City, LL.B., New York Univ., 1927. He and his brother, Benjamin A. Javits (1894–1973), developed a flourishing legal practice. Entering politics as a supporter of Fiorello H. LaGuardia, he was active in local politics before his election (1946) as a Republican to the U.S. House of Representatives. After serving four terms (1947–55), he was elected (1954) New York state attorney general. In 1956 he was elected to the Senate, where he served four terms (1957–81). One of the most prominent liberal Republican senators, he was a strong advocate of civil-rights legislation. In 1980, already very ill, he was defeated for reelection in the Republican primary and then ran unsuccessfully on the Liberal ticket. His writings include Discrimination U.S.A. (1960).

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