ERISA sits like an heirloom in your grandparents' musty basement. It reeks of the mold of over-regulation, but it has such powerful meaning, it's really hard to simply throw away. We can try some quick fix patches but, really, how many modifications can you make on a buggy whip so it remains useful in a universe of driverless cars?
This cornerstone piece of legislation was created in an era when pensions dominated the retirement landscape. Today, pensions have been recognized for the folly that they are, but we've already covered that ground. They're rarely seen in the private arena, and then only as the benefits legacy of the largest and oldest corporations. Today, the 401(k) plan dominates the retirement benefit world, and ERISA needs to be fundamentally restructured to fit into this new world. Don't take my word for it, see what others say in "These Six Structural Changes to ERISA Can Improve Employee Retirement Readiness."
When we put this all together and peer into the crystal ball, we see two possible paths for the future of ERISA. And, unlike Robert Frost's poem, we should be comforted to know as we approach this fork in the road, neither choice is less taken than the other.
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Rather than a paradigm shift, the most likely future will evolve from experiences that have already led to success. Both continue in the tradition of self-responsibility paved by the 401(k). Both will continue to rely on the participation of professional advisors to enhance the prospects of success. Most importantly, both have already been around for decades and have been proven to work.
First, let's reiterate what the ideal future does not include. It does not include a government-run or government-sponsored retirement plan. We already have one. It's called Social Security. Sooner or later we all know that bubble will burst.
The challenge isn't to continue to find ways to enable this failure. The challenge is to discover how to meet the retirement needs of citizens without relying on Social Security. Again, we've already discussed this in, "It's time we create a Child IRA."
The evolution of ERISA has two likely outcomes. The first is based on a simple adjustment to the way things are today.
Currently, for the most part, companies sponsor their own 401(k) plan. 401(k) plans evolved from profit-sharing plans, and funding profit-sharing plans was contingent on the continued success (i.e., profits) of the underlying company. But the sponsorship of a 401(k) plan does not come without a cost, whether in terms of money, time, or excessive fiduciary liability. Sometimes this cost is too great to bear, especially for smaller companies.
To address this, a future form of ERISA can make it easier for companies to enroll in 401(k) plans sponsored by independent trustees.
Similar to today's MEP plan, this "Super" MEP would be available to all companies – large and small. No longer would company officials be burdened by the overwhelming matrix of compliance regulation. No longer would company officials have to devote inordinate amounts of time away from their core business. No longer would small companies be forced to pay higher administration costs for their plan due to lack of economies of scale.
What's more, the Super MEP doesn't require legislation. The IRS already permits it. All that's needed is a flick of the wrist from the DOL.
The second likely outcome does require legislation.
As with the Super MEP, it also removes fiduciary liability from the traditional company sponsor. This one piggy-backs off the success we've seen in IRA vehicles (both traditional and ROTH).
In this future scenario, employee and company contributions go directly to the employee's IRA. The employee would be responsible for creating the IRA account, and the company would remain responsible for instructing the payroll processor to transfer the funds. This outcome is a little tricky in that care would need to be taken to prevent it from devolving into a 403(b)-type mess. That's were prudent legislation comes in.
There you have it. The two most like futures of the New ERISA Order. Which do you prefer?
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
