ON ERISA's third birthday, the candles on its cake must seem more like lit fuses to some observers. For the Employee Retirement Income Security Act, the monumental pension and welfare benefits reform legislation that was signed into law Labor Day 1974, now is confronted with potentially explosive financial, judicial and administrative situations.
Last month, Matthew M. Lind, acting executive director of the Pension Benefit Guaranty Corp., warned that his agency can expect "astronomical" liabilities of $350 million next year if a large number of multiemployer plans are terminated as predicted. In such an event, the current 50-cents-per-capita premium would skyrocket to $50 a head.
PBGC was set up under ERISA to insure defined benefit pension plans so that workers get their benefits even if their employer is unwilling or unable to pay. Mandatory coverage for multiemployer plans - typically those of labor unions - is scheduled to began Jan. 1. The National Coordinating Committee for Multiemployer Plans has told PBGC that many "dying industries" intend to eliminate their pension plans then rather than pay the premiums.
The millinery fund bailed out in May, leaving a $6 million liability to PBGC. The milk industry, due to terminate its fund this fall, will have liabilities of $15 to $20 million. Others with unfunded vested liabilities that may terminate are the longshoremen's and maritime industry's unions, and funds of the laundry and dry cleaners industries.
(Under ERISA, an employer is not required to maintain a pension plan. But if he does, it must meet strict - and often expensive - government requirements.)
Although Lind considers the $350 million liability estimate for 1978 "somewhat of an overstatement," he nevertheless views it as a serious problem. This figures is in addition to an estimated $60 million "deficit" PBGC expects by January 1978. That is, were the agency required to pay out today every cent it has pledged to beneficiaries over a number of years, it would come up about $60 million short.
This month, Lind plans to go to Congress to ask for a 125 per cent increase in single-employer-plan premiums to $2.25 a head. He warns that premiums will have to rise to $4 if PBGC is not allowed to continue to invest its $180 million in assets (held in trust for terminated plan beneficiaries) in the private market where the return is higher than on government securities. The Treasury and the Office of Management and Budget have objected that PBGC's investing in the private money market could endanger these assets. The decision is up to President Carter.
To forestall a huge new liability of $350 million. Sen. Jacob K. Javits, ranking minority member of the Committee on Human Resources, has introduced a bill granting a year's delay for the start of multiemployer mandatory coverage. Because a $50-a-head premium - actuarily required to meet the $350 million liability or PBGC would sink - would accelerate a vicious spiral of plan terminations, Lind and Javits are separately studying various ways to make PBGC more flexible in dealing with the problems of declining industries' pensions plans.
There are several methods under discussion, but they all have unresolved drawbacks. The burden of liability, now shared with healthy plans much the way car insurance risk is spread among good and bad drivers, could be separated. A PBGC rule that an employer ending a plan is liable for up to 30 per cent of his assets to pay plan benefictaries could be waived in bankruptcy reorganization. On the other hand, if an employer risked no penalty for ending a plan, many more plans would be terminated and PBGC's liability further increased.
"We're a long way from being in Social Security's situation," Lind said, alluding to that agency's financial difficulties. But he cautioned that PBGC will have serious problems if it is not put on a pay-as-you-go basis.
Javits has expressed "deep concern" about several cases now wending their way to the Supreme Court that could have a profound effect on ERISA and PBGC. One is Daniel v. International Brotherhood of Teamsters. John Daniel was denied a pension in 1973 after 22 years of service because his employment was interrupted by a 3-month involuntary layoff 15 years before. He filed a class action against the union, charging that a pension fund is a security because, when a person takes a job in a company having a defined contribution pension fund (of the type where benefits depend on management's skill in making profits), he is making not only an employment decision but an investment decision as well. Daniel alleges that because he was not informed that the break in service could cost him his earned benefits, the anti-fraud provisions of the Federal Securities Act applied.
Last month, a federal appellate court ruled in his favor. The Teamsters have pledged to appeal to the Supreme Court. The Labor Department has argued that, should pension funds be considered securities, the collective bargaining process would be disrupted because the union no longer could act as the exclusive agent of the employee who is not privy to investment decisions being made on his behalf.
Javits's position is that Congress did not intend pension funds to be securities and, moreover, that ERISA's own disclosure provisions make Securities and Exchange Commission antifraud provisions unnecessary. The ERISA Regulations Industry Committee, representing 80 large companies, predicts that a decision in Daniel's behalf would open the door to some $200 to $300 million in liabilities for PBGC as pensioners sue to collect pensions they were denied. On the other hand, Daniel has the support of the Gray Panthers, an activist group of senior citizens.
Another case is Connolly v. Pension Benefit Guaranty Corp. John L. Connolly and 12 other trustees of the $200 million Operating Engineers' Pension Trust took PBGC to court to determine whether theirs was a defined contribution or a defined benefit plan. In the former case, the fund would not be covered by PBGC insurance and they could recoup the $12,000 paid in premiums. The fund actually combined the two types, meaning a certain amount is paid in for each employee and a certain sum is promised upon retirement, it is up to the fund to assure that its investments produce the promised sum.
The U.S. Court of Appeals in Los Angeles ruled it was a defined contribution plan and therefore not subject to PBGC coverage. Should Connolly win the final round, the effect would be to deny termination insurance to 8.5 million participants in 2,500 collectively bargained plans worth about $200 billion. Of course, PBGC also would lose the premium revenues.
Finally, PBGC suffered another adverse decision last May in Pension Benefit Guaranty Corp. v. Avon Sole Co. when a bankruptcy judge ruled in effect that a parent company does not have to make up the pension liability of a subsidiary.
The dual-administration fuse on ERISA's cake is somewhat longer. When the reform was enacted, a political compromise gave the Labor Department and the Internal Revenue Service joint jurisdiction. The result has been lack of coordination leading to duplication and delay, plus a rapid succession of Labor Department pension and PBGC administrators. In July, the Comptroller General issued a stinging report saying that only 15 regulations out of a total of 53 needed were issued and 10 proposed during ERISA's first two years. (Regulations will not be complete until after fiscal 1978.) Only one-fourth of the 621 applications for prohibited transaction exemptions were acted upon. Moreover, it took Labor ten months to begin filling new personnel positions it had been granted, including seven months to define the duties and qualifications of the positions.
In the House, Reps. John H. Dent (D-Pa.) and John N. Erlenborn (R-Ill.) have proposed creating a single agency to be placed in either Labor or the IRS. This has the support of former administrators and Ralph Nader, but neither government agency wishes to yield to the other.
Javits favors an independent SEC-style pension agency. So do the 1,900 labor and management trustees who were polled last month at a convention of their International Foundation of Employee Benefit Plans.
Sen. Lloyd M. Bentsen (D-Tex.) has introduced a bill to split the functions down the middle, with Labor keeping jurisdiction over the fiduciary responsibility and prohibited transactions, and IRS tending to participation, vesting and funding. The administration, however, is opposed to reorganization now. In the Comptroller's report, it pleaded for more time to assess ERISA's efficiency and to let Labor get on with the job of issuing regulations.
Meanwhile, Congress is trying to get rid of duplication and delay legislatively. Just before the recess, the Senate Finance Committee approved Sen. Gaylord Nelson's (D-Wis.) bill to prescribe a single filing form contining only absolutely necessary information, a single annual filing date, and a single agency to receive the reports (and pass them on to the others). The Federal Paperwork Commission estimates such provisions would result in initial savings of $74.5 million and annual savings of $283 million thereafter.
Pension consultants say the time and money spent in paperwork alone have been an important factor in so many small employers renouncing their pension funds. This summer, IRS commissioner Jerome Kurtz stated on the basis of a telephone survey that 30 per cent of the country's 500,000 pension plans already have terminated or will be terminated, affecting 5 per cent of all participants. Since ERISA began, IRS records show 34,263 actual terminations, compared with 89,544 new plans. IRS is now seeking to determine whether some 300,000 employers who have not filed their intentions plan to continue or end their plans.
PBGC plan terminations hit 7,300 in 1976, but have fallen off by a third in the past four months, according to Lind. An analysis of the reasons for termination shows that in 1976 more employers (about 35 per cent) mentioned ERISA as one factor in their decision to terminate than was the case in 1975, when business was recovering from the recession. Furthermore, ERISA was mentioned more than twice as often by employers with enough funds to cover their liabilities as it was by those without sufficient funds, those whom economic adversities would force to terminate pension plans anyway.
The majority of the plans being created are profit-sharing plans. Individual Retirement Accounts, to which the employee rather than the employer contributes voluntarily, also have increased significantly in numbers and assets. Still another way of persuading small plans not to terminate is a simple, federally run plan, proposed by Javits. Such a system would have an enormous impact because 97 per cent of all plans are classified as small.
Another ERISA drawback - from the trustees', if not the beneficiaries', viewpoint - is the so-called "prudent man" rule which states that a pension manager "must act as a prudent man acting in a like capacity and familiar with such matters." Simply put, it aims to hold trustees personally responsible for making bad investments with pension dollars. Today those private pension dollars add up to $250 billion, of which $150 million is invested in the stock market.
Pensions managers and trustees contended three years ago the rule would lead to rash of lawsuits by plan participants or a dearth of trustees. Thus far there have been no lawsuits, according to Labor. (The acts cited in the Teamsters pension fund suits predate ERISA.) But two-thirds of those polled by the International Foundation of Employee Benefit Plans said ERISA made it "increasingly difficult to find trustees."
The most serious unintended result of the prudent-man rule has been to make trustees unwilling to invest in other than blue-chip stocks, thus depriving smaller, never, riskier enterprises of venture capital. A 1976 Georgetown University study documented the concentration of pension fund assets in the hands of relatively few managers who invest in relatively few securities. This year, 83 of the convention delegates agreed ERISA kept them in blue chips; in 1976, the figure was only 63 per cent.
Earlier this year, Bentsen introduced a bill to impose a tax penalty on any pension manager with more than $1 billion in assets who holds more than 5 per cent of a company's stock. He also wanted to give them leeway to invest 2 per cent of assets in companies capitalized at less than $25 million. The 2 per cent figure later was eliminated by venture capitalists who feared it might become a ceiling. The bill now says that an investment shall not be considered imprudent just because the company is small or its stock not widely traded.
As a further relaxation of the prudent-man rule, Sen. Charles Mathias (R-Md.) has proposed that the soundness of investments be judged on the total portfolio. In this way a manager could not be sued over a single bad investment if his overall record was good.
Those measures already have run into opposition. Javits declared on Aug. 4. "Such a provision, though, should not permit trustees to invest in unacceptable speculative investments. (And), if we are going to open the subject of social uses to which pension assets can or should be put, I think it is worth considering whether a percentage of such assets, particularly those in pooled real estate trusts managed by banks and insurance companies, should be invested in low and moderate-income housing. I do not see how the venture capital application of pension funds can be given priority over other socially desirable applications."
Ian D. Lanoff, administrator of the Pension and Welfare Benefit Programs in the Labor Department, opposes the legislation for these and other reasons. In fact, he denies that ERISA led to the concentration in blue chips. He says, in fact, that it began before ERISA, and that it has run its course. In 1975, 45 per cent of stock investments by pension plans were composed of the "Favorite Fifty" stocks, he noted. In 1976, only 17 per cent were. As for adopting the port-folio approach. Lanoff claims the legislation is unnecessary because ERISA already directs managers to diversify so as to minimize the risk of large losses.
ERISA, the product of 10 years work, was designed to end the hardships suffered by workers who found all too often the retirement benefits they were counting on would not be paid because of trustee abuse, inadequate funding, or unfair qualifying regulations. It was not designed to be retroactive, unfortunately.
So, perhaps one of the best presents for the public on ERISA's third birthday, in addition to all the other proposed legislation, is a pledge made by Javits to "study the possibility of paying some kind of retirement benefits to the approximately one million workers who lost their pensions prior to ERISA."