From many perspectives, the Employee Retirement Income Security Act of 1974, or ERISA, has been a success.
A relatively uniform body of law has developed to govern pension and welfare plans from California to Camden and Miami to Minneapolis.
Although not always a perfect fit, ERISA has even managed to keep up with the utterly massive shift from defined benefit pension plans to defined contribution 401(k) plans.
Even though the extent of the success may be fairly debated by reasonable individuals with opposing viewpoints, by design of those who drafted ERISA, that success has been limited to only those plans covered by the law.
On ERISA’s 40th birthday, I think it appropriate to briefly explore the implications of these decisions made so long ago.
Title 1 of ERISA includes multiple exemptions to its coverage, with the most prominent being plans sponsored by governmental entities and churches. The legislative history behind these exemptions is simply too broad to delve into in this brief article.
However, the governmental exemption is most often explained from a policy perspective by the federal government’s unwillingness to challenge the states’ rights to regulate plans covering their own employees, especially when most state plans were created via state legislation. The policy behind the church plan exemption is most often explained by the federal government’s reluctance to get involved in the internal affairs of the church on constitutional grounds.
Whatever the wisdom behind these policy choices, I think it fair to argue that the federal government’s absence of regulation governing these plans has actually affected these plans just as much as if they had just been included in ERISA in the first place.
This is so because the preemption and totality of ERISA, a prominent policy goal with respect to private plans, has resulted in states failing to enact state-level legislation covering ERISA-exempt plans that address ERISA’s basic safeguards of funding, vesting, and fiduciary management rules that are the pillars of (whatever) success ERISA has had.
Said another way, in the absence of ERISA, in nearly all states there is not an alternative state scheme that competes. Instead, there is simply a void.
Whether or not this was an appropriate policy choice then, or should continue to be the policy in the future, the effects of the choice are real. You would be hard-pressed to find a state that does not have funding issues related to a state-sponsored pension plan. Estimates for nationwide underfunding in these types of plans are in the trillions.
Additionally, in the last two years, eight class-actions have been filed challenging the scope of the church plan exemption which became popular with church-associated economic actors such as hospitals, which also have had underfunding issues in the billions in their pension plans.
So on this 40th birthday of ERISA, I ask these questions: will the states ever meaningfully address the issues that caused ERISA to be passed in the first place? Or will the federal government instead craft a solution of its own?
I hope we get the answer before another 40 years has passed.