Seven years ago, Rory Albert saw a wave of litigation
heading toward his clients, large corporate
defined-contribution-plan sponsors. Albert, then co-chairman of
the employment and labor law department at Proskauer Rose law
firm in New York, knew he would need to lawyer up. So he called
his friend Howard Shapiro, an ERISA litigation attorney based
in the New Orleans office of Shook, Hardy & Bacon, and made
him an offer. Shapiro had spent his career defending U.S.
corporations accused of breaching their fiduciary duties under
ERISA, the landmark statute otherwise known as the Employee
Retirement Income Security Act of 1974.
In 1998 a federal judge certified the first ERISA
class-action lawsuit when defined-contribution-plan
participants alleged that their investment in their
companys stock IKON Office Solutions was
not prudent. After the Enron Corp. and WorldCom accounting
frauds sent shares plummeting, stock drop cases
began to multiply. Soon these class-action suits raised
legitimate complaints about high fees and opaque terms. By
2005, after Albert had talked Shapiro into working for
Proskauer, more than 11,000 ERISA cases were making their way
through federal courts. Tens of millions of dollars in fees
later, the move seems prescient. This is not the
sky is falling, says Shapiro, referring to
the deluge of litigation. This is real.
In less than a decade, 800 of the largest U.S. corporations
AOL Time Warner, AT&T, Caterpillar, Delta Air Lines
and General Electric Co. among them have been sued by
classes of employees who believed their self-directed
retirement plans failed to meet standards set by the 1974 law.
Today, Citigroup, Merck & Co., Morgan Stanley, Nortel
Networks Corp., Pfizer and Wal-Mart Stores are embroiled in
retirement-related lawsuits. The price tag has been steep.
Corporations have already paid more than $4 billion in
settlements, according to Fiduciary Counselors, a
Washington-based legal advisory firm.
In the absence of a national retirement policy, litigators
in the courts not lawmakers have played an
outsize role in shaping Americas retirement future. Why?
Participant-directed defined contribution plans, most often
401(k)s, did not exist as mainstream retirement schemes when
ERISA was created. That mismatch has resulted in billions of
dollars in legal fees and settlements as participants sue to
make their savings plans look more like old-fashioned pensions
as defined by the statute. The beneficiaries: attorneys on both
sides of these lawsuits and the mutual fund industry, which now
holds $2 trillion in defined contribution assets, half of the
total in these plans. The losers: retirees who pay higher fees
and employers embroiled in lawsuits to support the industry
built around ERISAs shortcomings.
Seven years in the making, the omnibus employee benefit
statute was once hailed as a panacea for the major ills
besetting employer-sponsored defined benefit pension plans. Its
passage shortly after Watergate destroyed the Nixon presidency
was praised as proof that members on both sides of the
political aisle, along with agencies such as the Internal
Revenue Service and the Department of Labor, could work
together for the common good. But almost 37 years later, a slew
of factors legislative, economic, social, technological
have undermined the heart of the well-intended act. To
begin with, the ambiguity and complexity of language have made
it difficult for employers to sponsor traditional pension
plans. The compendium of code and law is virtually unreadable
(except by those highly motivated), a War and Peace of complex
congressional provisions packed into 3,000 turgid pages.
Making matters worse, Congress has not stopped tweaking the
original act, adding components to boost tax revenue, benefit
niche constituents or serve other political purposes.
ERISA is a Christmas tree, says Frank Cummings, who
was general counsel to the late senator Jacob Javits and helped
craft the statute. Every year, Congress would hang
another ornament on it.
A third factor undermining the effectiveness of the act are
the profound changes in the pension world. Social and financial
industry upheaval demographic developments, industry
deregulation, global competition and ever-more-complex
financial instruments has altered the employment
landscape, leaving millions of workers without solid retirement
plans. For example, in 1974 an American worker could be
expected to keep a job for his or her entire career. Today,
according to the U.S. Bureau of Labor Statistics, the average
worker changes jobs up to a dozen times, making it difficult to
vest a pension that requires years of service to the sponsoring
The slow, often litigious efforts to make savings plans act
more like traditional pensions by defaulting employees
into plans, then selecting fund options for them, for example
are not helping these amateur investors reach retirement
goals. The new programs were never intended to be primary
retirement savings vehicles, says Groom Law Group attorney
Stephen Saxon: Thats where ERISA has failed.
But ERISA had already failed to protect the entity it was
designed to save: the traditional defined benefit plan.
When historians trace back the demise of defined benefit
plans, the No. 1 culprit will be ERISA, says Ted Benna,
who is considered the father of the 401(k) plan. The
unfortunate part of ERISA is that its done the opposite
of what it was intended to do.
Congress, focusing on bank bailouts and health care reform
legislation, has had little time or incentive to update pension
law. Still, momentum has been building to create a new pension
model. About 80 percent of the 78 million people in the
U.S.s private workforce are covered by a savings system
that by most measures has proved inferior to traditional
pensions. Even more alarming, another 78 million workers are
not covered at all and must depend on an underfunded Social
Security system. (Without any change to the present system,
Social Security Trust Fund assets are projected to be exhausted
in 2037, according to a 2010 annual report of the governing
As defined contribution plans come under pressure, concerns
arise that employers may give up altogether on those programs.
What happened to DB plans? asks Proskauers
Shapiro. I fear that unless we do something with respect
to the class-action litigation that has targeted the defined
contribution plans, in 15 years we may be having the same
conversation: What happened to all the DC plans?
ERISA plaintiff attorneys insist their role ultimately
improves the 401(k) plan programs they sue, ensuring that
employees will be better prepared for retirement.
Litigation like ours helps make sure that DC plans are
run better, asserts Lori Feldman, a partner who handles
ERISA cases at New Yorkbased Milberg. Unless
theres litigation, companies arent likely to take
these steps, because it costs money. Fair point, observes
Drexel University law professor Norman Stein, a critic of
defined contribution plans as substitutes for bona fide
retirement programs. But he insists litigation is no long-term
fix: Were always a lot better off in a world where
you dont need lawsuits to get a result. Adds
Proskauers Shapiro, Weve already lost the
defined benefit battles, and now were in danger of losing
defined contribution plans as well.
Most ERISA historians trace the statutes origins to
the 1963 collapse of the Studebaker Corp. car manufacturing
plant in South Bend, Indiana. At the time, 4,400 vested hourly
workers, most of them members of the United Auto Workers union,
lost all or most of their benefits. Cummings, then an attorney
with Cravath, Swaine & Moore in New York, was sent to work
on the plant closing. The South Bend pension plan was so
underfunded that workers with 20 to 30 years on the assembly
line could only expect benefits of about 15 cents on the
dollar. Some received nothing. Resolved to avoid such insult to
future workers, senator Javits tapped Cummings as his general
counsel and put him to work on reform.
Beginning in 1967 lawmakers and representatives of the
Department of Labor and IRS worked to hammer out viable
legislation. Cummings and others traversed the country speaking
to companies and labor unions, urging support for the
legislation. It took seven years to get all the elements in
place, Cummings recalls. On Labor Day 1974 newly appointed
president Gerald Ford signed ERISA into law.
Although the statute codified the provision of employee
benefits through a private employer, it was never intended to
mandate employer-sponsored pensions. The concept of providing
pensions and benefits as a substitute for salary had sprung up
before World War II, then kept growing; in the early 1970s
legislators believed pensions would continue to expand. After
ERISAs passage there followed growth in trusts, pension
funding and vesting. Of critical importance, Title IV of ERISA
established the Pension Benefit Guaranty Corp., a government
safety net designed to avoid future Studebakers. Many pension
industry observers agree that the first few years after
ERISAs enactment were a promising period for pension
beneficiaries and employers.
By 1982, however, a national recession hit its nadir, and
Congress began its practice of raiding pension funds for tax
revenue. Lawmakers, unhappy at large sums of tax-free money
accumulating in pension plans, passed the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), kicking off a series of
reductions in creditable compensation the amount of
money used to build up pension plans. Along the way, a 50
percent excise tax was imposed on any pension plan that was