The Employee Retirement Income Security Act of 1974: An Outdated Regulatory Framework for Retirement Investors

By Russ, Emma L. | Iowa Law Review, November 2019 | Go to article overview

The Employee Retirement Income Security Act of 1974: An Outdated Regulatory Framework for Retirement Investors


Russ, Emma L., Iowa Law Review


I. Introduction

Congress passed the Employee Retirement Income Security Act of 1974 ("ERISA") to protect private employee retirement pensions.1 ERISA provided much needed reform because of the absence of any regulation to prevent the misuse of pension plan funds.2 The landscape of retirement plans has drastically changed in ways drafters of ERISA could not likely have imagined. When ERISA was enacted, defined benefit plans3 or traditional pensions were the primary retirement plan.4 However, employers have moved away from traditional pension plans to 401 (k)s and Individual Retirement Accounts ("IRA(s)").5 Retirement is no longer as certain as it once was because the burden of saving and investing for retirement has shifted from employers to individual participants.6 As a result, retirement investors are increasingly dependent upon the advice of investment professionals.7 However, investment professionals are not all subject to the same standards of care when rendering investment advice.8 Consequently, the need for regulation over how these entities behave and represent themselves to financial consumers has grown.9 However, ERISA is not equipped with addressing these recent developments, leaving retirement investors largely unprotected.10 Reforms by both the U.S. Department of Labor ("DOL") and the U.S. Securities and Exchange Commission ("SEC") to accurately reflect the realities of the current retirement marketplace have fallen short.11

This Note argues that Congress should propose an amendment to ERISA that would impose a fiduciary standard on broker-dealers who provide investment advice for all retirement plans. Part II provides an overview of the historical development of private pension plans, the emergence of ERISA as federal protection for private pension plan beneficiaries, and recent developments by the DOL and SEC to address retirement market changes. Part III analyzes the problems associated with ERISA's inability to protect investors and the SEC's ineffective proposed solution. These problems stem from the fact that most investment advice given today is outside the scope of ERISA due to a shift away from employer-based retirement plans and increased dependence on investment professionals who share different standards of care. Part IV proposes that Congress amend ERISA and apply the highest standard of care, a fiduciary standard, to broker-dealers not previously subject to such a standard across all retirement accounts. Part V concludes.

II. Background

In order to understand the need to protect retirement savings, it is necessary to explore how the idea of retirement first arose and developed over time. Therefore, Section II.A discusses where the idea of retirement originated. Section II.B details the rise of private pension plans in the United States. Section II.C addresses the mismanagement and abuse of funds by plan managers that accompanied the emergence of private pension plans, leading to the enactment of ERISA. Section II.D provides an overview of ERISA's statutory structure. Section II.E examines how shortly after ERISA was enacted, the DOL created a test to further define fiduciary under Title I of ERISA. Section II.F introduces the DOL's recent efforts to create a more encompassing definition of fiduciary under ERISA. Finally, Section II.G focuses on the Fifth Circuit Court of Appeals vacating the DOL's rule. Additionally, this Section discusses the SEC's proposed rule in the wake of the rejection of the DOL's fiduciary rule.

A.Origins of Retirement

The idea of retirement originates in military history.12 Historians credit the Roman Empire for conceiving the idea of retirement income by offering military pensions to retired soldiers.13 Augustus Caesar incentivized them with a pension to prevent insurrection within the empire.14 Military pensions also have a historical place in the United States.15 During the American Revolutionary War, the colonies extended coverage to members of the militia. …

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