Third in a series on ERISA at 50

The Employee Retirement Income Security Act known as ERISA, which officially celebrates its 50th anniversary next month, has been a key law governing American retirement policy since 1974. It ensures fiduciary responsibility, transparency and accountability in employer-sponsored pension plans to protect the interests of employees.

Despite these successes, the framework that ERISA created faces significant challenges. Changes to tax policy can undermine the incentives that are crucial to retirement savings. In addition, a growing wave of litigation threatens the operational integrity and financial sustainability of ERISA plans and the tens of millions of workers they serve. Finally, regulatory and legal pendulum swings could undermine the stability that characterizes this landmark law.

Read more: Developing attacks on ERISA preemption threaten uniformity of benefits

As ERISA enters its sixth decade, policymakers must overcome these potential obstacles to preserve the law’s effectiveness in protect and promote retirement security. Here’s how these key questions played out:

Challenge 1: Reducing or removing incentives will reduce retirement savings
Private retirement vehicles have allowed workers to develop additional retirement savings outside of Social Security that can supplement their long-term needs. Employer-provided retirement plans form the backbone of retirement savings for tens of millions of Americans. In the private sector, defined contribution plans like 401(k)s have proven popular for decades. In fact, government data shows that Americans have $8.1 trillion in these plans and another $11.5 trillion in Individual Retirement Accounts (IRAs).

The most significant changes to pension policy in a generation were achieved by passing the SECURE Act of 2019 and the SECURE 2.0 Act of 2022. The reforms encouraged small businesses to join together to create pension plans, increased repayment contributions and delayed required distributions. They also introduced in-plan emergency savings accounts and allowed employers to make matching contributions to retirement plans based on an employee’s qualifying student loan payments, among dozens of other meaningful changes.

While implementation of the SECURE laws is still ongoing, these retirement vehicles have allowed ERISA plan sponsors to invest in the financial well-being of their employees.

Despite successfully helping individuals save for the future, some want to change the tax treatment of these retirement tools. Limiting current tax preferences to pay for entitlements or other government spending, or further limiting the amount that can be saved on a tax-deferred basis are disastrous ideas.

Advocates suggest that redistributing these resources would benefit middle- and low-income Americans. This ignores the very real truth that savings in 401(k)s are often the bulk of a middle-class family’s savings. A basic law is that eliminating incentives generally produces less of that activity. Those who argue that there is a retirement savings problem should realize that limiting savings for current and future workers is a mistake.

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Challenge 2: Risk of litigation makes pension benefits more expensive and less attractive
ERISA protects workers and retirees from unscrupulous bad actors, but class actions threaten a counterproductive extreme. Plaintiffs have manufactured lawsuits that nitpick nearly every aspect of plan administration: service provider fees, investment menu construction, and liability management just to name a few. While some claims have merit, many do not. All are costly to defend, and employers are often content to avoid protracted, expensive litigation.

This is a collective action problem where one issue is compounded by another. Easy settlements may make economic sense in individual cases, but they create perverse, industry-wide incentives to continue generating these lawsuits. Courts have recognized the risks of these lawsuits and require plaintiffs to plausibly allege legal failures, but the lawsuits continue to proliferate.

A recent complaint argued that any renewal of benefit plan agreements was presumptively prohibited by law, with companies unable to rebut this presumption until later in the litigation. ERIC and other industry groups have asked the Supreme Court to review this case (Bugielski et al v. AT&T) because opening the door for the plaintiffs’ bar to pursue potentially frivolous and costly litigation has real consequences. Employers are less likely to offer or maintain plans, and employees are likely to bear the costs of defending these lawsuits and higher insurance premiums.

Read more: ERISA at 50: What might the next 50 years bring?

Challenge 3: Regular uncertainty threatens stability
Whether you’re a tax lawyer or a taxidermist, businesses thrive when the rules are safe and stable. Both the upcoming election and the latest Supreme Court decision i Loper Bright Enterprises v. Raimondo Drastically reducing legal deference to administrative agencies will have far-reaching consequences for regulations governing personnel plans.

Plan design and administration depends on companies, workers and plan service providers knowing the rules. Sweeping changes to long-standing regulations have immediate consequences and create uncertainty. These changes may take the form of a policy shift following an election or lawsuit challenging an ordinance. The Supreme Court’s historic decision will be debated for years, but some practitioners are already noting immediate effects on pension policy. For example, the decision could affect legal challenges to Labor Department rules affecting investment advice and fiduciary duties.

Practitioners also evaluate how authorities will react. Will they take more cautious political positions? Will they rely less on regulations and more on audits and compliance as a proxy for decision-making, a complaint some have already raised? Finally, how “settled” will settled case law really be? When the rules are constantly changing, long-term planning is difficult or impossible.

Answering these questions will take time. The lack of certainty that sponsors of ERISA plans face can complicate the plans’ ability to operate effectively.

As ERISA celebrates half a century, its supporters must address three key challenges: potential tax changes that could weaken retirement savings incentives, increased litigation, and uncertainty about future rules. Instead, policymakers should focus their efforts on maintaining the integrity of ERISA and its role in protecting retirement benefits for future generations.