Forty years ago, Congress enacted the Employee Retirement Income Security Act of 1974, commonly known as ERISA. The federal law set minimum standards for most voluntarily established pension and health plans in private industry to protect individuals covered by these plans, according to the U.S. Department of Labor website.
The Business Journal asked two area financial advisors, both of whom work extensively with retirement planning, to evaluate how the law reads and performs
with regard to today’s realities.
Since ERISA came on the scene, the act has been amended numerous times, “expanding the protections available to health benefit plan participants and beneficiaries,” the DOL website stated.
One high-profile amendment is the Consolidated Omnibus Budget Reconciliation Act (better known as COBRA) that enables some workers and their families to continue their health coverage for a limited time after loss of a job that provided health care
coverage. Another is the Health Insurance Portability and Accountability Act (HIPAA), designed to help working Americans and their families who have preexisting medical conditions or might “otherwise suffer discrimination in health coverage” based on health-related factors, according to the DOL website.
“The original intent of ERISA was to provide a retirement savings vehicle, with tax incentives, to encourage the American workforce to save money of their own, for the purpose of supplementing their Social Security, which was becoming more and more insufficient to sustain the modern standard of living,” H. Grant Perry, managing principal and CEO of Pinehurst Capital Inc., which has an office in Wilmington, said in an email.
“It was also intended as a means to prevent employers from discriminating in favor of the highly compensated management, to provide smaller employers who couldn’t afford a Defined Benefit Pension Plan with a more affordable alternative, and also to provide larger employers who were abandoning their traditional pension plans with a substitute.”
The extensive and detailed nature of the law “provides significant benefits by establishing minimum standards” for plans, according to Ross Marino, a certified financial planner with Raymond James Financial Services in Wilmington.
“Compared to pre-ERISA days, it’s a vast improvement,” he said in
an email. “ERISA was really the start of major guidelines for benefit and retirement plans. Since then, more laws have been enacted which have changed the landscape of saving for retirement.”
Both financial professionals, however, believe that ERISA has become too cumbersome.
“Although ERISA still satisfies its original intention, it has become onerous for employers and their employees. Every year since its inception, Congress and the Department of Labor has piled on more and more regulations, mandates and restrictions,” Perry said.
“These excessive requirements make it exorbitantly expensive for the employer to provide the benefit, and less attractive for the employee to contribute, because the increasing cost of reporting and compliance for the employer has forced them to back off on matching and profit-sharing contributions.”
Marino agrees that, like many government solutions, ERISA is “simply too complicated.”
“The amount of regulations and requirements are daunting,” he said. “Think of it like the tax code. It’s complicated and requires a lot of work to comply.”
Perry goes further, saying that Congress has “transformed what was intended to be a boon for the retirement plan industry into a giant, multi-trillion-dollar slush fund that they can’t wait to get their hands on.”
He cites efforts to levy a surtax on all plan balances and even on all contributions to employer-sponsored plans, which, if enacted, would amount to a double tax on these tax-deferred funds.
“Additionally, there has also been a freeze on increased contribution limits until 2023,” he said.
Asked what “easy fixes” he would recommend for ERISA right now, Marino suggested that simplifying ERISA, especially for smaller businesses, would benefit a large number of people.
The current laws, he said, “have influenced many companies to terminate pension plans in favor of 401(k) plans. A change is needed that will allow plans to offer a simple and inexpensive pension-like guarantee.”
Perry had three suggestions:
First, “require employer-sponsored plans to add a Roth option for tax-savvy employees who understand that traditional pre-tax contributions to a 401(k) plan can be a tax time bomb,” he said.
Second, “eliminate the contribution limits for ‘Non-Highly Compensated’ [defined as annual income of less than $115,000] employees. This will allow older individuals to contribute more in order to catch up on their retirement nest egg because of having to raise and educate children or take care of aging parents.”
Perry’s third suggestion was to eliminate the Required Minimum Distributions (RMD) on balances under $1,000,000. “A million dollars doesn’t make you ‘rich’ any more, and the RMD on amounts below that aren’t generating significant tax revenue anyway, but they are causing middle-class people to have to pay taxes on up to 85 percent of their Social Security income, which is a travesty in and of itself,” he said.
Perry would like to see elimination of the forced reduction in contributions by highly compensated employees just because there is a lack of contributions by the non-highly compensated. He also wants a requirement for full disclosure of all fees present in employer-sponsored retirement plans, and would prohibit revenue sharing between plan providers and the plan trustee.
“Currently, kickbacks to plan trust companies from investment companies for sending investors their way are not required to be disclosed to the employee plan participants,” Perry said.
Marino again encourages people to think of ERISA the way they think about the tax code.
“ERISA is too complicated and requires a lot of time and skill to comply. The government needs to simplify. This would allow more businesses to adopt retirement plans and allow more employees to build a nest egg for the future,” he said.
