ERISA turns 40: ‘Good enough’ isn’t good enough
Ed. Note: This article first appeared on BenefitsPro.com on September 2, 2014. This piece is republished with permission from BenefitsPro and its parent company. The original article can still be found on their site.
ERISA and I were both born in 1974, so we are becoming what many consider to be middle-aged this year by turning 40. I can honestly say that I had no idea what ERISA was for the first half of both of our lives, but in the last 20 years, it has been central to my focused work on the defined contribution space.
Ironically, section 401(k) of the tax code, which has driven the growth of the DC market today, wasn’t even enacted into law until four years after ERISA came into being. Yet, I find that the law is – for the most part – very well suited to address what is now the predominant retirement vehicle for most private sector workers.
That being said, I find it interesting that many plan sponsors, as well as many providers, are daunted by ERISA, particularly as it applies to DC plans. The big scary “fiduciary” word haunts many, as they fear the consequences of not meeting the required standards. And inevitably this leads to plan sponsors feeling as though they can’t implement solutions that they may believe would benefit participants because there may be risks attached. Examples include re-enrollment, active management, alternative investments, custom funds and guaranteed income.
It’s true that there are significant consequences enacted in ERISA for failure to act appropriately, such as engaging in a prohibited transaction. But I think ERISA is most effective if it’s viewed not as a set of prescriptions and restrictions, but as legislation enabling a sponsor to do what it needs to meet its goals. ERISA requires plan sponsors to go through a disciplined process and, ultimately, to act in the best interest of participants. It requires that fees be reasonable, not just the cheapest.
And most importantly, ERISA explicitly has provisions to allow non-experts, like some plan sponsors, to bring in experts. Sponsors aren’t “on their own” and they can hire, for example, someone to give them advice. That person will be held to the same heightened fiduciary standards. Further, ERISA allows a sponsor to delegate decision-making authority, such as picking managers, to another party, leaving the sponsor the requirement to prudently select and monitor that party, but not be responsible for the day-to-day implementation of the plan.
While plan sponsors want to offer DC plans that are easy to use by participants, they need more sophisticated solutions underneath.
My hope for the next 40 years of ERISA is that plan sponsors and their providers don’t use their fears of the wrath of ERISA as excuses to offer “keep it simple” defined contribution plans that are just “good enough.”
Rather, I hope that they see the ability of ERISA to empower them to innovate and partner with experts to move their DC plans to a level of excellence that’s required to provide the retirement security American workers need.