Happy 34^th Birthday, ERISA!

Today marks the 34^th anniversary of the date that the Employee Retirement Income Security Act of 1974, known to those in the field of pensions as ERISA, was signed into law.  In a tribute to the workers who would be helped by the new law, that day, September 2, 1974, fell on Labor Day.

ERISA’s enactment was brought about in part by the devastating “Studebaker” incident, which left thousands of employees without the pensions they had been promised.  When Studebaker, at the time one of the nation’s largest car manufacturers, closed its Indiana plant in 1963, it left an underfunded pension behind and some workers ended up receiving as little as 15 percent of the pension they had been promised.  When he signed ERISA into law, President Gerald Ford said that with ERISA, “the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed.”

Indeed ERISA has achieved many improved protections for workers.  Before ERISA, companies could require employees to stay with the company for 25 or more years to earn the right to a pension benefit. With ERISA that requirement shrank to 10 years.  When a company like Studebaker failed prior to ERISA’s enactment, pensions of thousands of workers were lost because there was no federal pension insurance program to protect their hard-earned benefits.

Pensions were important in 1974 for the same reasons they are important today.  Along the way improvements have been made, including some that allow workers to earn pensions after 5 or fewer years, protect women, and tell employees about the benefits they have earned.

But there is still a great deal of work to be done.  Too many employers offer no retirement plan coverage to their employees.  Workers with plans often encounter obstacles in enforcing their retirement rights, more protections are needed for women, and people are not informed about the fees they pay for their retirement savings accounts. To make matters worse, a growing number of companies are freezing their pension plans and breaking promises to their employees.

Happy Birthday, ERISA.  You’ve done a lot to protect the retirement security of American workers, but there is still important work to do.

Care to learn more about the history of ERISA?  Read The Employee Retirement Income Security Act of 1974: A Political History by James A. Wooten.

An Associated Press story appearing in the Washington Post this week carries disturbing news about the deteriorating financial health of older Americans.

According to an analysis by the Consumer Bankruptcy Project, which studied bankruptcies filed between 1991 and 2007, the bankruptcy filing rate has risen dramatically for Americans over the age of 55, with the oldest age group having the greatest increase.  People 65 and up were more than twice as likely to file in 2007 as compared to 1991.  The filing rate for those 75 and older more than quadrupled in the same time period.

Elizabeth Warren, a Harvard Law School professor and one of the study’s authors, is quoted, “Older Americans are hit by a one-two punch of jobs and medical problems and the two are often intertwined.  They discover that they must work to keep some form of economic balance and when they can’t, they’re lost.”

The AP story notes that:

Higher prices for ordinary consumer goods have hit seniors on fixed budgets. For older Americans living below the poverty level, or not far above, a safety net likely doesn’t exist for economic setbacks such as medical problems. And some fall prey to scams that cripple their finances.

Warren noted increasing numbers of Americans are entering their retirement years with significant debt and are still paying off mortgages. She said it was wrong to assume that lives of luxury are bankrupting seniors; rather, they’re incurring debts to meet needs such as medical treatment.

Half of all older households in the U.S. are trying to make ends meet on roughly $28,000 a year.  At PRC we’re concerned that the financial situation of retirees could become even worse in the future. As more companies freeze or stop their traditional pensions, more older people may have to file for bankruptcy.  The reality is that pensions have helped keep millions of retirees out of poverty.  People with pensions and Social Security have more than twice the income of those living on Social Security alone.

You can download a copy of the Consumer Bankruptcy Project report, “Generations of Struggle,” at the website of the AARP Public Policy Institute here.

Last month, I spoke with a gentleman who was trying to locate a pension from a company he had worked for in the 1980s.  Since he had left the company, it had merged with and been acquired by other firms several times.  As a result, the caller didn’t know where to go to apply for his pension.  I followed an electronic “paper trail”, which helped guide me through the company’s various buyouts and name changes.  Finally, I found the current company, which was now under the ownership of a large multinational corporation.  I looked up the phone number for their retirement plan and gave it to the caller.

This man’s problem isn’t uncommon, and it’s frustrating that the nation’s pension system would be so hard to navigate.  Why didn’t the pension plan let this man know that his pension had changed hands when the company was bought and sold?  How about creating a centralized registry of lost pension plans, similar to those in the United Kingdom and Australia?  It shouldn’t require James Bond to track down a pension that someone has rightfully earned.

One way to prevent such problems is to keep good records about your benefits and to monitor what happens to your pension plan over time.  Correspondence from your pension plan administrator, notices about changes to the plan rules, and financial statements are items that should be saved and kept somewhere that you’ll remember.

Even storing these important documents in an old shoebox is fine as long as you label the box and remember where it is.  Easier said than done, I know. But in this age where companies are continually changing their names, moving locations, and merging with other companies, it’s a strategy worth thinking about.

What else can you do to keep track of your pension? Read the tips in our new fact sheet.

WSJ journalists Ellen Schultz and Theo Francis report that “At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives’ retirement benefits and pay.”

According to the article, companies such as Intel Corporation and CenturyTel, have “moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans.” This practice allows companies to capture tax breaks that are intended for the pensions of regular workers and instead use them to pay for executives’ supplemental benefits and compensation.

Current law allows high-paid executives to have extremely generous “executives-only” plans for themselves, but these plans must be funded out of corporate revenues, and do not give companies the same tax breaks as pension plans that are structured to pay benefits to all employees, both high-paid and low paid. The article goes on to detail how corporations - advised by well-paid benefit consultants - have found ways to side-step these rules in order to, in the words of one company official, “take advantage of tax breaks by paying executive benefits out of a tax-advantaged plan.”

As the article explains, highly sophisticated strategies allow corporations to pay the executives out of the funded, tax-favored employees’ pension plans by taking advantage of loopholes in rules that, ironically, were meant to make sure that the employees’ plans did not pay disproportionately larger benefits to executives.

As a practical matter, what this means is that all taxpayers end up footing the bill for special benefits that are paid to top executives. In addition, as the article points out, these maneuvers may lead to weakening of pension plan funding - which, in some instances, can result in significant benefit cuts for workers and retirees.

We think this practice is outrageous and that Congress and the Department of the Treasury should move quickly to make sure that workers’ pension plans are not used as corporate piggy banks to finance executive pensions. What do you think?

Last week the federal minimum wage rose to $6.55 an hour, increasing the annual earnings for a full-time minimum wage worker to $13,624.  While it’s certainly the right move for Congress to raise the minimum wage for current workers, it raises an important question about retired workers.  Take a look at our statistics page and you’ll see why: The average retired worker’s Social Security check is now less than that of a minimum wage worker.

According to a new report from the Century Foundation, two thirds of older Americans receive 50 percent or more of their income from Social Security and a stunning 21 percent receive all of their income from Social Security. These numbers are even higher for women and minorities. It is shocking that after a lifetime of hard work millions of retirees are living on less than the minimum wage.

And the federal minimum wage is just what its name implies - a bare minimum. Indeed, it is so low, that the Economic Policy Institute notes that 23 states have set their own higher minimum wage requirements. Shouldn’t older Americans relying on Social Security have more adequate incomes during their retirement?

To learn more about Social Security, take a look at the web sites for the National Committee to Preserve Social Security and Medicare and the National Academy of Social Insurance.  For a fun perspective, take a look at the Social Security Opera.

When I was head of the Employee Benefits Security Administration (the Department of Labor agency charged with protecting pensions) during the Clinton administration, I became concerned about whether or not people who had 401(k) plans truly understood how much they were paying in fees and what those fees were for. So in 1997 and 1998, we held hearings and issued a report [PDF] on the issue.

A couple of months ago, I decided to take another look at the 1998 report to see what had changed in the last 10 years.

My conclusion? Not much has happened – except that a lot more workers are saving their money in 401(k) plans. That of course means that a lot more money is subject to fees. In fact, with more than $3 trillion in assets, these plans produce tens of billions of dollars in revenue for the financial companies who run them. But even a small difference in fees can make a huge difference in how much money you’ll have for retirement. The Government Accountability Office has estimated that a 1% increase in fees on an account that earns a 7% annual return will reduce total retirement savings by 17% over 20 years!

An employer has a duty to make sure that the plan pays reasonable fees. But the 1998 study found that many employers, particularly smaller companies, could not get sufficient information to make this judgment. It’s equally important for you – the consumer – to know how much you are paying for your 401(k).

Fortunately, things are about to change. Lawsuits have been filed over 401(k) fees. A bill is moving in the House of Representatives. More important, the Department of Labor has just issued proposed regulations to expand the fee information that is given to both employers and workers.

So far, it seems that the proposed regulations are a good first step. The Labor Department has recognized that people with 401(k) accounts have a right to know how much their investment returns are reduced by fees and how much they are paying for recordkeeping and other administrative tasks. But more can be done. The Pension Rights Center will be conducting an in-depth analysis of the proposed regulations and submitting comments to DOL to ensure that the final regulations provide the clearest and most useful information about fees as possible.

We welcome your input. Do YOU understand what you are paying for your 401(k) and what you get for it? Does your employer? Do you want and need more information? Let us know!

On Wednesday, the Special Committee on Aging of the U.S. Senate held a hearing on the impact of 401(k) loans and withdrawals. A fundamental point that we made in our statement to the committee is the fact that 401(k) plans were intended to be a supplement to retirement income, not the primary source of it:

There was a time when most large and medium-sized American businesses sponsored real pension plans, which provided employees with a guaranteed lifetime benefit when they retired. In such plans, employees could not withdraw benefits before they retired and plan loan programs were virtually non-existent.

In this universe, defined contribution plans – such as today’s 401(k) plans – were usually supplemental retirement plans, the savings leg on the proverbial three-legged stool of retirement preparation. It thus made some sense for our legal rules to permit employers to provide some pre-retirement access to account balances through loans and in-service withdrawals, since many employees were not dependent on these plans for the majority of their retirement income. Moreover, as 401(k) plans increasingly came onto the scene, advocates for withdrawals argued forcefully that employees would be reluctant to contribute to such plans unless they had some emergency access to their money.

But the landscape of retirement savings has undergone seismic change during the last two decades. In 1983, 63 percent of private sector workers had defined benefit plans and 12 percent had defined contribution plans. In 2004, this was totally reversed: 63% had defined contribution plans (primarily 401(k) plans) and only 20 percent had defined benefit plans. What this means is that for millions of people, their 401(k) plan accumulations will be their only source of retirement income other than Social Security.

Witnesses at the hearing included Christian Weller of the Center for American Progress, who is co-author of a new study on 401(k) loans. Looking at 15 years of data on 401(k) loans, the authors conclude that solutions must be found to reduce people’s need or desire to tap into their 401(k)s.

The hearing got quite lively when it came to the subject of 401(k) debit cards. Imagine being able to take money out of your 401(k) account with just a swipe of a card. It’s fast! It’s easy! It’s the dumbest idea since New Coke! Anyone with a regular debit card or a credit card knows how much easier it is to spend money with a little piece of plastic. Credit card debt is a serious issue in this country. Borrowing from your 401(k) only compounds the problem. Fortunately, Senator Herb Kohl (D-WI) and Senator Chuck Schumer (D-NY) are introducing legislation to stop this harebrained scheme.

Too often we hear bad news stories about how public pension plans are underfunded and that they’re a drain to taxpayers. But a congressional hearing last week told a different story. The hearing, Your Money, Your Future: Public Pension Plans and the Need to Strengthen Retirement Security and Economic Growth, focused on how public sector pensions efficiently provide adequate retirement income to a large segment of the workforce.

Barbara D. Bovbjerg, Director of Education, Workforce, and Income Security Issues for the Government Accountability Office (GAO), discussed a new GAO report showing that most state and local government plans have more than enough resources to pay the pensions they have promised to the 20 million workers covered by their public-sector pension plans. These defined-benefit plans provide guaranteed pensions to the more than 20 million policemen, firemen, teachers and other public servants who help build and protect our society.

William Pryor, a professional firefighter and paramedic, added a personal touch to the hearing. He said that “for firefighters, a pension helps them have decent salary replacement that will never run out, good medical care and solid survivor benefits for their families.”

Sherrill Neff of the venture capital firm Quaker BioVentures made the point that defined benefit pension plans not only provide guaranteed income to retirees, but that they are also a critical engine to the nation’s economy. Defined benefit plans provide billions of dollars of funds to be invested in new companies – helping promote medical research, launch new technologies and create hundreds of thousands of new jobs.

Mr. Neff also mentioned that approximately 90 percent of venture capital is raised from institutional investors that include defined benefit plans as well as foundations, corporations and university endowments. In other words, funds from defined-benefit plans have helped launch companies like Google, Cisco, Yahoo! and countless others.

Given the good news about the status of the nation’s public pensions, Representative Earl Pomeroy (D-ND) declared at the hearing that it was “a good day for pensions.”

Christian Weller, an Associate Professor at the University of Massachusetts, noted that public pension plans provide most of the characteristics of the ideal retirement plan, including: broad-based coverage, secure money for retirement, portability of benefits, shared financing by both employees and employers, professional management of assets, spousal benefits, and low fees.

If these are characteristics of an ideal retirement plan, shouldn’t we look to public plans as a model – and consider fashioning a retirement income system with these elements for all American workers?

A little background first. An employee submits a claim for benefits from a pension, disability or health plan. The plan’s claims administrator denies the request for benefits. The employee appeals the denial to the plan. The plan turns down the appeal.

The employee’s next step is to go to court. What should a court do? Should it hear evidence, look carefully at the documents, and reach an independent decision on whether the employee should get her benefits? Or should it simply rubber-stamp the plan’s decision?

Almost 20 years ago, in a case called Firestone v. Bruch, the Supreme Court said courts should generally rubber-stamp decisions unless the plan “abused its discretion.” But, what does “abuse discretion” mean? One judge said that a plan abuses its discretion only if its decision is “off the wall.”

In the Firestone case, the Supreme Court also ruled that, when a court decides whether a plan has abused its discretion, one factor it should consider is whether the plan administrator had a conflict of interest when denying the claim for benefits. As can be expected, conflicts of interest can frequently occur, especially if the entity responsible for approving the claim is the same entity responsible for paying the benefit. In the Firestone decision the court did not offer any guidance on how to tell whether the plan administrator had a conflict of interest or what a court should do if there was a conflict of interest.

These were the questions answered by the Supreme Court when it decided MetLife v. Glenn.

These are the basic facts in MetLife v. Glenn. Wanda Glenn was covered by a disability insurance plan, which was managed by MetLife. She applied for disability benefits, which MetLife, as the insurer, would have had to pay out of its own pocket. MetLife denied the claim and her appeal.

Ms. Glenn sued MetLife. MetLife claimed that its decision should be upheld because it did not abuse its discretion in rejecting the benefit application.

Ms. Glenn claimed that MetLife had a conflict of interest because it denied a benefits claim it would have had to pay for, so the Court should not simply rubber-stamp the company’s decision. It should make its own independent decision, after considering the evidence and the terms of the plan.

MetLife replied: we don’t have a conflict of interest; we are just an insurance company making a routine benefit denial.

So what did the Supreme Court decide?

Was there a conflict? The Supreme Court said that, since MetLife was deciding whether it had to pay a benefit out of its own pocket, it had a conflict of interest. This part of the decision is obviously good for employees.

What should a court do when there is a conflict? Ms. Glenn’s attorneys argued that because there was a conflict of interest, the trial court should disregard the plan’s decision and make an independent judgment as to whether she is entitled to benefits. The Supreme Court disagreed, stating that, even though MetLife had a conflict of interest, the court should have upheld the benefit denial unless MetLife had abused its discretion. In deciding whether MetLife abused its discretion, the court should have considered the conflict as “a factor” when making its decision. (The Supreme Court did find that, in this case, MetLife had abused its discretion, so Ms. Glenn won.)

Unfortunately, the Supreme Court did not provide trial judges with any real instruction on how much weight they should give to conflicts of interest. Without instruction, judges will have to wing it. And when pro-business judges wing it, they will probably de-emphasize any conflict of interest and side with the plan if the benefit denial passes the “off the wall” test. Combined with the vagueness of what constitutes an “abuse of discretion,” MetLife v. Glenn ends up being a decidedly mixed bag for workers and business.

Want to know more? Read my in-depth discussion of MetLife v. Glenn.

Now, two new bills, H.R. 5822 and S. Amdt. 5004, would waive the 10 percent penalty tax on withdrawals from 401(k) accounts for workers whose homes are entering foreclosure status.

As well-intentioned as the waiver might be, we fear it could lead to bad consequences. Taking money from a 401(k) plan to save a house might be a quick fix but it can also jeopardize your future retirement security.

401(k) plans are, after all, supposed to be for retirement. And with employers freezing or terminating their pensions at a rapid rate, 401(k)s may be the only source of retirement income other than Social Security for millions of Americans.

A steady stream of reports has found that contributions to 401(k) plans are dropping, people preparing for retirement hold serious misconceptions about their retirement needs, and many Americans are inadequately prepared for retirement. Combine these circumstances with a volatile stock market and the concept of making it easier for workers to raid their 401(k) plans for non-retirement purposes, and it creates a perfect storm.

There is another drawback to these bills that may not be so obvious. Money in your 401(k) is protected from creditors. Your house is not. There is no guarantee that using 401(k) money will prevent a home from falling into foreclosure later. If the house falls into foreclosure even after you’ve tapped into your 401(k), you’ve lost your house and your retirement fund. H.R. 5822 and S. Amdt. 5004 may create a bigger problems than they solve by converting money that is protected from creditors into a vulnerable asset.

We don’t want anyone to lose their home, but if people use their 401(k) money now, what will they have left for retirement? Instead of a quick-fix, Congress should be looking for a long-term solution to the mortgage crisis – one that today’s homeowners won’t regret 20 years down the road.

What do you think?