It wasn’t high costs or 401(k)s—necessarily—that ended the corporate pension plan’s reign, but rather ERISA itself.
A recent paper from John Langbein, Yale Law School’s Sterling Professor Emeritus of Law and Legal History, argued that the 1974 landmark law’s structure made defined benefit (DB) plans simply too difficult for employers to sustain.
“I've taught ERISA for about as long as there's been an ERISA, and I've been observing trends I discussed in the paper,” Langbein said. “The main theme is that the ERISA legislation had the effect of making defined benefit pension plans so burdensome for employers that they have been abandoning them and no longer start them.”
The paper described the rapid switch from DB plans to defined contribution (DC) plans beginning in the early 1980s. He noted DB plans covered about 85 percent of private-sector employees who had any pension coverage.
“In the years since, employers have retreated from offering DB plans, by terminating existing plans or closing (“freezing”) them to new participants, while also ceasing to establish new DB plans,” Langbein wrote. “By 2003, only 33% of large employers provided DB plans. By 2015, only 3% of Fortune 500 employers offered traditional DB plans to newly hired employees.”
Conventional dictates that the DB’s demise had to do with “large changes in economic conditions and employment patterns, together with the emergence of a viable DC alternative, the 401(k) plan.” Yet it isn’t the full story and ignores ERISA’s part.
While the decline of manufacturing, technology, deregulation, corporate reorganization, and interest rates were reasons mentioned—among others—he said more, and deeper, disincentives exist for DB plan sponsorship, including de-risking and vesting. However, the most important, by far, was the steep increase in the Pension Benefit Guarantee Corporation premium.
“Rather than premium, actually, I prefer to call it a tax,” he added. “It's so easy to avoid. All you’ve got to do is transfer assets over to the insurance industry, and you can walk free.”
Yet what about a hybrid plan? If ERISA isn’t conducive to offering a DB plan, is it conducive to cash-balance plans and the recent announcement from IBM?
“First, I think that DC plans need to be understood as not pension plans,” he responded. “They are simply savings plans, sometimes slightly tax-favored in the way they have developed. They are basically upper middle-class tax shelters.”
He referenced research by University of Virginia Law School Professor Michael Doran, a staunch DC plan critic, who claimed retirement reforms enacted over the past 25 years were not meant to help “lower-income and middle-income earners” but is a “stalking horse for the real objective of expanding the tax subsidies available to higher-income earners.” It's a popular topic among academics recently that DC plan defenders say is not accurate.
Overall, the biggest surprise from the research was just how quickly the DB to DC switch was made.
“What I found most surprising, if that's the word, is the extent and rapidity of the abandonment of defined benefit plans,” Langbein concluded. “And by abandonment, I mean not only the fact that sponsors are terminating them or freezing them on the one hand, or that potential sponsors no longer start them, but also the draining of the assets in the existing plans as they moved from the pension, ERISA-regulated world over to the insurance industry. I had not understood how large that movement was and how large it is projected to be going forward.”
A copy of the paper can be ACCESSED HERE.
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