ERISA: have we reached paralysis by regulation?

A growing number of states have either enacted or are considering legislation aimed at expanding the availability of employment–based retirement saving. At an AARP–sponsored event earlier this week, there was a warning about the dangers of asking too much and creating paralysis by regulation. When it comes to ERISA, that advice may have come a couple of decades too late.

The main thing we’ve learned is…

Earlier this week, several representatives from state programs gathered in Chicago at an event hosted by AARP and a number of other retirement groups. The event was conducted under the Chatham House Rule (which is why none of the discussion described below is attributed.)

Some time was spent looking at the start–up of the National Employment Savings Trust (NEST) in the UK. When it came to lessons for the U.S. from this experience, top of the list was the succinct “do not regulate yourselves into paralysis.”

That advice has come at least twenty years too late, judging by the amount of time spent over the following hours on the role of ERISA.

One school of thought emphasized the many positives of ERISA. It offers better consumer protection; it allows employers to contribute to retirement savings programs; there are higher contribution limits; and so on. These benefits—which are real—are why it is likely that the upcoming DOL guidance on state-based retirement plans will ease the path for states willing to embrace ERISA, as well as providing guidance for those who do not. But the pro-ERISA stance was very much the minority view in the room.

ERISA as no–go area

Instead, the majority of those representing various state initiatives made it clear that anything under ERISA was a no–go as far as they were concerned. That’s not because they don’t like consumer protection or don’t want employers to be able to contribute if they choose. It’s not because of any specific requirement contained within ERISA. It’s not the parts that are the problem; it is the whole.

There’s forty years of regulatory baggage. As I write, I am looking at two hefty books (pictured), adding to 5 inches, printed on thin paper and already out of date. This baggage has become, in the words of one participant “a cudgel for those opposing legislation to beat us with.” While the baggage is familiar for a private sector that has been working with it for forty years, it’s easy to see why states would hesitate to embrace it when starting from scratch. It’s too much.

No legislation is easy to pass and in most cases it may well prove almost impossible to gain widespread support for state–based retirement programs which would trigger ERISA. So my guess is that no more than a handful of states will choose the ERISA route. Perhaps we have indeed reached paralysis by regulation; the pursuit of perfection killing the good.

Of course, this does lead to the question of whether it may make sense to allow the private sector to offer open MEPs (acting as fiduciaries, and governed by ERISA) rather than relying only on state-sponsored programs. But that’s a topic for another day.