ERISA: Law, Interests, and Consequences

Article excerpt

The Employee Retirement Income Security Act of 1974 (ERISA) preempted state law on employee benefits, required that federal courts adjudicate disputes about employee benefit claims, established fiduciary standards, and required that corporate plan sponsors provide participants with audited annual reports, summaries of plan descriptions, and other disclosures. ERISA also established a system of pension plan termination insurance under the Pension Benefit Guaranty Corporation. Subsequently, Congress amended ERISA with 14 statutes meant to reduce tax expenditures and improve rules on vesting and discrimination against low-paid employees.(1,2) In 1988, Congress passed Internal Revenue Code section 89, which would have intensified the regulation of welfare plans such as health insurance. But in 1989, Congress repealed it in response to corporate pressure. My claim is that despite its stated purpose of protecting low-paid plan participants by providing them with disclosure and enforcement rights, ERISA has tended to reflect the interests of large plan sponsors and fiduciaries.(3)

This article begins with a review of applicable institutionalist theory. The law's evolution from pre-ERISA common law through ERISA's legislative history and its subsequent development is described. Then, results of a survey done to evaluate ERISA's consequences are reviewed, and suggestions for further reform are offered

Institutionalist Theory

Institutionalists have argued that the legal-economic nexus is the process that determines law and the distribution of economic resources. The legal-economic nexus involves the assertion of economic power in the creation of law. But law distributes power and access to government asymmetrically. Hence "government determines the structure of the economy and economy determines the structure of government" |Medema 1989~.

But law serves symbolic, as well as distributive, purposes, "as a psychic balm in the face of ambiguity" |Samuels 1989~. Government protects conflicting interests in accordance with a collective bargaining process in which the working rules of law may deviate from their formal statement. For example, Munkirs |1985~ illustrated how public opinion against trusts engendered the antitrust laws, but the trusts' power transformed "enforcement of law into a ritual." Conservative courts, vague legislation, and interaction between regulatory agencies and vested interests contributed to the dichotomy between legal ceremonialism and the distribution of economic benefits among interests. This institutionalist framework contrasts with neoclassical and public choice theories, which explain legal rules in purely redistributive terms and overlook both the law's symbolic content and the context of institutional power in which law evolves |Stigler 1975; Olson 1982; McChesney 1991~.

Institutionalists have begun to examine the working rules of the private pension system. Hayden |1989~, for example, hypothesized that "pension investments are predominantly controlled by the Central Planning Core." Bradley and Smith |1992~ noted the complexity of profit-sharing plan design and questioned the usual assumption of unbounded rationality. Ghilarducci |1992~ observed that moral hazard plagues pension contracts and that employees lack bargaining power to obtain fair working rules. In her view, a firm's dual role of profit maximizer and social insurance provider conflict, and labor unions have recognized that firms use information asymmetries to benefit themselves at employees' expense. Other economists |Mitchell 1988~ also have concluded that among pension plan participants, "missing and incorrect knowledge is widespread. Myopia about pension incentive structures is troubling since workers may save or consume suboptimally."

The Evolution of ERISA

If ERISA is an artifact of a collective bargaining process, then it is likely to reflect the distribution of power prior to its passage. …