Happy 50th Birthday, ERISA!
Welcome to the first edition of the DC Pulse Newsletter. The goal of this monthly publication is to dive deeper into a topic covered in our quarterly DC Pulse or touch on developments in the defined contribution (DC) marketplace. For our first edition, we focus on ERISA as it turns fifty and look at the impact it has had on retirement savings over the past five decades.
Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 and was signed into law by President Gerald Ford. ERISA provided meaningful protections for DC and defined benefit (DB) plan participants along with the creation of the Individual Retirement Account (IRA). Over the past half century, ERISA has fundamentally changed retirement savings for US workers by protecting their benefits and expanding opportunities to save. Other important milestones include the creation of the 401(k) in 1978 and the passage of 401(k) regulations in 1981 that allow employees to defer income until retirement. Fast forward twenty-five years, and the Pension Protection Act of 2006 (PPA) encouraged automatic enrollment and the use of target-date funds. More recent retirement legislation, including SECURE 1.0 in 2019 and SECURE 2.0 in 2022, have encouraged additional ways to save and contribute to retirement plans.
Growth of Retirement Savings
ERISA established minimum standards to protect workers from losing their retirement benefits and introduced regulation to better ensure transparency, accountability and protection for retirement plans. While ERISA initially focused on safeguarding traditional DB plans, as 401(k) plans quickly gained popularity as the primary vehicle for retirement savings, provisions that established fiduciary duties, requiring retirement plan fiduciaries act in the best interest of plan participants, became critically important. The end result has been a meaningful rise in account-based savings, driven by growth in IRAs and DC plans, as shown in?Exhibit 1.
Fifty years later, the retirement landscape looks meaningfully different. We have new types of plans in place and have shifted more responsibility to individuals for their own retirement security. Retirement assets in the United States have grown to $40 trillion as of Q2 2024, including $11.3 trillion in DC plans (including $8 trillion in 401(k) plans) and $14.5 trillion in IRAs.[ii]
Put into individual participant terms, since 1974, average individual retirement assets have increased nearly ten times, from $30,800 to $297,800.
The flexibility and portability of 401(k) plans contributed to their rapid adoption, allowing employees greater control over their savings. One of ERISA’s primary objectives was to increase access to retirement savings for a broader segment of US workers. ?Non-discrimination rules have helped to ensure that plans cover a wide array of rank-and-file workers, rather than just executives and high-income employees. ???
DC plans are funded by both employee and employer contributions, so it’s critical for individuals to start saving early and consistently over their working life. Since PPA in 2006, automatic enrollment has gained in popularity and has proven to be effective at increasing overall plan participation rates, especially among younger workers. However, a coverage gap still exists. 70% of workers in private industry are covered by a retirement plan (67% by defined contribution, 15% by defined benefit), but only 53% of all participants covered are participating.[iv] Further effort will be needed to help to close this gap.
Has ERISA been a success?
Well, that depends on who you ask. If you look at the Mercer Global Pension Index, it benchmarks 48 retirement systems around the world based on adequacy, integrity and sustainability, the US retirement system rates a grade of “C+” in part due to lack of coverage for all workers and leakage in the system.[v]
But if you look at how far we’ve come in the last fifty years, ERISA has helped millions of US workers build a more secure retirement. Despite how much responsibility has been shifted to the individual, I’d give the US more than a passing grade. Is there room for progress? Of course. That just means there is plenty more to do over the next fifty years.?
[i] Source: ICI Viewpoints, Revolutionizing Retirement, August 30, 2024. Revolutionizing Retirement | Investment Company Institute ( ici.org ) .
?[ii] Source: ICI Quarterly Retirement Market Data, Release: Quarterly Retirement Market Data, Second Quarter 2024 | Investment Company Institute ( ici.org ) .
?[iii] Source: ICI Viewpoints, Revolutionizing Retirement, August 30, 2024. Revolutionizing Retirement | Investment Company Institute ( ici.org ) .
?[iv] Source: https://www.bls.gov/spotlight/2024/celebrating-50-years-of-protected-retirement-plans/ .
[v] source: Mercer CFA Institute Global Pension Index 2024 .