Workers should be the focal point of any retirement system, and more education is needed for the public to understand today’s complex options. CPAs can and should promote this aspect of financial literacy as the public’s trusted stewards.
By Lisa Germano, CPA, JD
Part I of this trilogy on ERISA’s 50th milestone, published in the spring Disclosures issue, discussed the Virginia solution for workers not covered by any retirement plan — RetirePath VA. Part II, from the summer issue, offered the author’s observations from an almost 40-year career specializing in ERISA from a tax and fiduciary governance perspective, as a CPA and attorney. This article, part III, will bring together statistical trends from the early 1990s to present day. Balancing the lessons learned with varying perceptions of the challenges ahead, this final piece includes the author’s call to action for CPAs who can see the opportunities to make a difference. With this call, she reminds us that CPAs do not need the technical expertise ERISA practice mandates, because the article showcases the need for the fundamentals of balancing life’s finances.
ERISA: Promises and shortcomings
The Employee Retirement Income Security Act (ERISA) of 1974 held great promise after more than a decade in the making. In many ways, it delivered. Yet, we could argue that Congress fumbled with the advent of the 401(k), employers shirked their duty to provide pensions, or no one anticipated the gig economy and technological advances. Perhaps workers themselves, human nature unchanged since 1974, didn’t pay attention to their own retirement needs. Wherever the blame lies, all stakeholders share it.
At the heart of it all, however, are the workers, who should be the focal point of any retirement system. A robust economy needs retirees spending confidently, knowing their financial future is secure. Federal and state governments continue to address the shortfalls of ERISA. Today, many discussions focus on the path forward, with the hope that efforts will target the right areas to secure a dignified retirement for workers.
Wherever legislation, regulation and the 401(k) concept lead us, the priority must be the workers. That’s the core of ERISA: protecting retirement income, offering security, and ensuring a dignified life after the work career is done.
The decline of pensions
In the 10 years that followed ERISA’s passage, 12,000 defined benefit pension plans were terminated — some of them fully funded.1 Some people attribute the plan terminations then and through today to the creation of the Pension Benefit Guaranty Corporation (PBGC) under ERISA.2 PBGC insures certain pension benefits. Others say market changes created a disincentive to maintain these plans.
In the early years of ERISA, employers who wanted to avoid the volatility of defined benefit plans often maintained two defined contribution plans: a money purchase pension and a profit-sharing plan. These allowed contributions of up to 25% of pay in profitable years: 10% to the pension and 15 % discretionary to the profit sharing.
Defined benefit pension plans guarantee a set amount of income for employees, with the employer shouldering the risk of market fluctuations. In contrast, money purchase and profit-sharing plans were invested in a pool managed by trustees in stocks and bonds, with annual valuations and quarterly performance reviews.3 Annual statements were highly anticipated, especially when employers showcased their yearly profit-sharing contribution. Employees’ balances bore the market changes; no monthly income was guaranteed as it was with the pension plans covered by ERISA.
Before the rise of the 401(k), employers typically covered the cost of recordkeeping and investment advisor services. Participants could only access their funds upon death, disability, retirement, or termination of employment — after a “cooling-off period” (typically one year) to discourage workers resigning to get their retirement plan funds and then asking to be rehired. These withdrawals often led to “leakage” as participants used their retirement distributions for immediate expenses. Leakage is one reason participants will not be ready for retirement because they spent their retirement savings during their working lifetimes.4
The introduction of salary deferrals to the profit-sharing plan [the 401(k) feature], thus allowing participants to access "their money," exacerbated leakage. Today, participants generally bear the cost of daily account valuations by paying the recordkeeper’s fee — even though daily access is unnecessary for long-term retirement planning. Many employers are unaware that daily valuation is optional, not mandatory.
Furthermore, participants now pay for an investment selection offering, even though few are sophisticated investors. Many default to funds chosen by plan fiduciaries, with all these costs a drag on overall savings.5
Mutual funds, collective investment trusts, exchange-traded funds and target-date funds have replaced simpler stock and bond investments, adding complexity, cost and fees for advisory services.
Asking the wrong questions
Today, workers often ask if a potential employer sponsors a 401(k) plan, but they miss more critical questions. They should be asking about pension plans, profit-sharing contributions, and the frequency and regularity of these contributions, which are far more important for retirement planning than salary deferrals.
Every worker faces financial ups and downs throughout their lifetime, making employer contributions essential when personal savings falter. However, many workers take short-term jobs, and a six-year vesting schedule isn’t likely to entice them without proper education on the benefits of staying. The employer needs to explain the totality of the employment offer and why it is better than asking about a 401(k).
Perhaps the question of the future worker will be about participant outcomes: How many participants are on track to retire when they wish? Likely, that is the heart of the question being asked today but the worker asking, does not yet know it.
Employers’ responsibilities
In today’s work environment, employers have more to consider than offering a salary. Retirement plans are just one component. They need to sell their overall opportunities to workers — advancement, learning new technologies, and a supportive work environment.
Middle-income and higher-income workers may benefit most from employer contributions and saving opportunities, while low-income workers need more education about their financial futures. Social Security will provide a larger percentage of pre-retirement income for low-income workers than for middle- or high-income earners, but these workers still need help bridging the gap for retirement.6
Employers should move toward offering contributions that help workers save less out-of-pocket, cover most plan expenses, and share profits in the retirement plan. This encourages long-term savings and provides clarity for future retirement goals. But first, workers need to value this aspect of an employer’s culture. That requires training decisionmakers and human resources with impactful information.7
The answer to the 401(k) question should be: We offer employer contributions to the plan which means you do not need to save as much from your paycheck. We pay for most of the plan’s expenses which allows your retirement to be closer in time to your goals. We share our profits in and out of the retirement plan. We offer retirement income coaching.
Workers seeking monthly income
Interestingly, many workers today seek monthly income from the amount shown in their 401(k) accounts8 — something a pension would have provided. Plan participants are starting to realize that their account balance is meaningless unless converted to a steady income stream in retirement. While recordkeepers now provide these projections as part of mandatory disclosures, they can be misleading without proper education. Proper education means personalization to provide context.
In recent studies, plan participants say they want some type of monthly income.9 Studies also show that retirees will spend more in retirement with some form of guaranteed income.10 This and other economic projections and studies should motivate a move toward offering guidance for employers to provide some income offering in retirement plans with fiduciary protection as is the case with target date funds.
Simplifying participation, overlooking education
Over the years, lawmakers have made it easier for workers to participate in retirement plans through automatic enrollment, automatic deferral increases, and default investment choices. However, while participation rates have risen, effective education has lagged. Participants may not fully understand how to maximize their retirement savings, and there is no mandate for long-term education on retirement planning. We solved the concern with getting more participation in retirement plans, but there needs to be more personalized and effective education. Studies also have shown that participants will choose higher rates more often without automatic enrollment11 or will let auto escalation take care of perhaps a higher rate.
Although the U.S. Department of Labor requires employers to educate employees on the investment options within their plans12, there’s no requirement to teach the fundamentals of saving for retirement. As a result, many participants spend their retirement funds during employment through loans never repaid and hardship withdrawals — another version of “leakage.”
Planning for tomorrow
Employers, especially small ones, need clear guidance on evaluating ERISA advisors. The marketplace is increasingly confusing with all the options. There are more advisors available to offer a product solution than there are ERISA consultants who can identify the right solution. Financial institutions providing services to retirement plans should have some form of a license or certification as fiduciaries to ensure they meet proper education and service standards because there is still too much spent in unnecessary fees.13
As employers look ahead, they should tailor their plans to meet the needs of their long-term employees, designing contribution strategies that consider age, service and income levels. Contributions are deferred compensation and should be communicated as part of the overall benefits package. Consider the desire participants have for monthly income and learn more about how to provide in-plan solutions.14
Life, for participants and plan sponsors alike, was simpler and less expensive in the 1980s with trustee-directed funds and employer contribution driven accumulation. While we can't revert to those days as the genie is out of the box, we can use the past to create a more educated and thus thoughtful future.
Participants are mainly on their own to find a trusted advisor to help them plan and execute the plan. What does that mean for the future? Well, even if everyone reading this article does everything right, what about the person sitting to your left or your right? Who is helping them?
If these workers do not plan, what will that mean in the future? Higher taxes or lower social security benefits in our retirement? How will that affect our economy?15 Where we go from here is the subject of much discussion in this 50th year of ERISA. The best result will come from discussion and debate.
Education and financial literacy
In 2008 the AICPA and VSCPA initiated financial literacy initiatives, starting with the AICPA’s “Feed the Pig” campaign. Beginning with students entering ninth grade in fall 2011, one standard unit of credit in economics and personal finance became required for graduation with a standard or advanced studies diploma, thanks to the advocacy of the VSCPA and member volunteers.
Long-term, financial literacy must be a priority — starting as early as first grade. Students should learn money management, investing and tax-deferred savings, progressing to budgeting and financial planning in high school. Financial education will lay the foundation for future generations to manage their retirements effectively. Workers want help but they also want their employer to do it for them.16
The CPA profession plays a vital role in promoting and improving financial literacy. If we abdicate on such basic principles, who will be the trusted advisor to this growing need for conflict-free information about retirement income and basic budget needs? If every CPA gave an hour each week to teach in their community, just imagine the impact we can have for the future.
The AICPA Financial Literacy Commission spurred many CPAs, like me, to act.17 There are resources available both on the AICPA website and VSCPA websites.18
Such education will empower future workers to plan for retirement and manage their financial futures as soon as they enter the workforce. As for me? I enjoy presenting to plan participants, generally without cost as a volunteer CPA trying to teach the importance of the retirement savings leg of the three-legged stool, and help them not need the support of the fourth leg.
The importance of coaching
Despite some employers thinking workers don’t want retirement education, studies show otherwise. Workers need guidance, and employers are in the best position to provide it. Coaching goes beyond annual fund performance reviews — it's about ongoing, personal financial planning that can make a meaningful difference in workers' lives.
Coaching is best offered by an employer who has done the due diligence to offer with confidence an expert who can give personalized advice. The way forward should be effective education, which is lacking in the delivery today in many plans.19
Conclusion
There is so much to reflect on, following 50 years of ERISA’s enactment. In today's complex retirement landscape, employers and workers alike need better education and guidance. If we don’t plan effectively, future generations may face higher taxes or reduced Social Security benefits, which could harm the economy. Where we go from here is critical, and the lessons from the past must inform the future as we navigate the next version of ERISA.
Lisa Germano, CPA, JD, is president and general counsel at Actuarial Benefits & Design Company in Richmond. Lisa’s professional career is everything ERISA: tax code compliance and fiduciary governance to help employers find the right retirement plan solution for their workers. She incorporates the rich history of ERISA and its aftermath to help workers plan and achieve their personal goals for the lifetime chapter that starts when full-time work ends. She is a long-time VSCPA volunteer and former chair of the Board.
- ERISA Recalled: Promises and Problems. Employee Benefit Plan Review. 1994.
- Pension Benefit Guaranty Corporation website.
- ICI Research Perspective. Volume 25, No. 5. July 2020.
- How America Saves. Vanguard. 2024.
- “Leave My 401(k) Alone! Looking for Tax Revenue in All the Wrong Places,” Benefits Law Journal. Vol. 37, No 1. Spring 2024.
- Understanding the Benefits 2024. Social Security Administration.
- 2024 401(k) Participant Study. Schwab. July 2024.
- EBRI 2024 Retirement Confidence Survey. April 2024.
- Guaranteed Income: A License to Spend. Research Income Institute. June 2024.
- Smaller Than We Thought? The Effect of Automatic Savings Policies. National Bureau of Economic Research. August 2024.
- ERISA Section 404 (c) and 404 (a)(5).
- Ghilarducci, Teresa. “Retirement Security Worse on ERISA’s 40th Anniversary.” Drexel Law Review. Vol. 6:453.
- Retirement Innovation and the New Age of Longevity. The Longevity Project. 2020.
- Wolf, Martin. “Increased Longevity Will Bring Profound Social Change.” Financial Times. May 2024.
- 2024 401(k) Participant Study. Schwab. July 2024.
- Levison, Clare. Frugal Isn’t Cheap.
- Lechter, Sharon. How Money Works.
- AICPA and VSCPA websites.
- Chiffer, Elizabeth. Financial Wellness Programs: Abundant Yet Underutilized. 2024.