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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 company’s 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 America’s 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 ERISA’s 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 employer.

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: “That’s 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 it’s 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 board.)

As defined contribution plans come under pressure, concerns arise that employers may give up altogether on those programs. “What happened to DB plans?” asks Proskauer’s 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 York–based Milberg. “Unless there’s litigation, companies aren’t 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: “We’re always a lot better off in a world where you don’t need lawsuits to get a result.” Adds Proskauer’s Shapiro, “We’ve already lost the defined benefit battles, and now we’re in danger of losing defined contribution plans as well.”

Most ERISA historians trace the statute’s 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 ERISA’s 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 ERISA’s 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 judged overfunded.

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