An insider describes how ERISA came to be.
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In this month's column, I continue my interview with Jeffrey Mamorsky. Here is Part 1.
Scott Simon: So you became legal counsel to a Business Roundtable Task Force, which had been established to review the various pension reform bills that were being introduced in Congress in the early 1970s?
Jeff Mamorsky: Yes, that's right. As counsel to a task force of lawyers from representative Business Roundtable companies, which was the precursor to the ERISA Industry Committee--known today as ERIC--I began working with the House Pension Task Force and the Senate Finance Committee in looking at the bills. And that led to my going to Washington to help draft ERISA.
So were you one of the principal drafters of ERISA?
Oh, no. ERISA was drafted principally by the staffs of Sen. Javits, Sen. Williams, Congressman Dent, and Congressman Erlenborn. I worked with the staff members and the congressional committees, and helped provide input to them. Don't forget that in those days there really weren't too many people with experience in running retirement plans. I was just lucky to be one of the few. I had the experience working at Prentice Hall and then working at Mobil, which had a huge benefit plans administration department, more than 100 people. While at Mobil, I worked with best-of-class benefit professionals such as Bob Peters, who was director of benefits, Art Foli, who was manager of benefit plans administration, and a brilliant in-house actuary, Ed McGarrity. So with the great team at Mobil and the other companies on the Business Roundtable Task Force, we were able to educate Congress in the pension legislation process. But it was educating the four gentlemen who were responsible for the ERISA statute and their staff people that was really our most important work.
Why are Title I and Title II of ERISA so much alike?
There were tandem pension bills moving through at the same time on both the House side and the Senate side. You had a House and Senate labor committee, and then you had the House and Senate tax committees, and they could never agree on things. Don't forget, this was very volatile, cutting-edge legislation then. Title I of ERISA is the labor title and Title II is the tax title--or really the employee benefits requirements of the Internal Revenue Code--and they are pretty much in almost all respects parallel statutes. If you put them side by side, you will see that eligibility, funding, and vesting are all pretty much parallel. Even in the prohibited transaction rules, you have the labor titles where the Department of Labor can impose civil penalties, and you have the tax title, where the IRS can impose excise taxes. And that's why Title I and Title II of ERISA are so much alike.
Do you know who came up with the name "Employee Retirement Income Security Act"? That's quite a mouthful and I was curious as to its origin.
I actually think that it was Sen. Javits who came up with the name, since he was the one who was the real catalyst of the pension reform effort. Sen. Javits was just a great man, having led the pension reform effort for many years conducting Senate hearings on the "broken pension promise" since the Studebaker plant closing in the early 1960s.
As you may know, there is a lot of debate going on now about the value of independent fiduciaries in qualified retirement plans.
Oh, yes, I'm very familiar with that debate and, in fact, have a great deal of personal experience with independent fiduciaries in qualified retirement plans since, among other things, I'm legal counsel for the largest multiple employer plan in America.
Later in our interview, I'd like to discuss independent fiduciaries in-depth, especially what value they bring to multiple employer plans (MEPs), but for now, could you please comment on them in general?
Well, the investments and operations aspects of a plan simply work better with independent trustees. The best way to run a plan is with an independent fiduciary, and the simple reason why is because that gets rid of all the conflicts inherent in running a retirement plan.
Your mention of independent fiduciaries gives me a good segue way into the great emanating idea of ERISA, which explains why it's structured the way it is. Look, I was a lawyer working on the business end, employed by Mobil, and legal counsel to the Business Roundtable Task Force. It was extraordinarily important to business to be sure that, whatever form ERISA took, companies would be involved in running their retirement plans. That made sense because the contributions made by businesses to defined benefit plans on behalf of employees--remember, no 401(k) plans existed then--was company money--well, at least before it landed in the plan. So companies really wanted to be sure that they would be involved in helping run their plans. This notion, of course, is completely contrary to how everyone else in the world operates their pension systems! They have separate trustees, independent trustees. The United States is the only country in the world where the employer plan sponsor can be a fiduciary of a pension plan. In all other countries, you have to have independent fiduciaries, independent trustees. In Europe, for example, employers can't get involved with retirement plans at all.
Could you please comment more on the "great emanating idea of ERISA"?
Yes, the rules for ERISA all emanate from the fact that they represent a grand trade-off for allowing companies to be able to run and control their retirement plans. If you're going to have companies run their employee benefit plans, pension plans, you obviously have an inherent potential conflict of interest. Our issue, then, the work I was doing for the Business Roundtable, was to convince the government that we could, in fact, put in the proper fiduciary structures and rules that would make sure that any employer, when they're wearing their hat as a fiduciary to their plan--as opposed to wearing their hat as a fiduciary to their stockholders--would do their job prudently. One result of this, for example, was the basic fiduciary rule that was drafted under ERISA section 404(a)(1)(A): to act solely and exclusively for plan participants. That's why the words "solely" and "exclusively" are in there, because an employer, or a designee of an employer such as an officer or a committee appointed to run the plan, even though they're working for the company, once they are a fiduciary of the plan, they have to act solely and exclusively for plan participants. So if there is any discretionary decision whatsoever, it has to be weighed in favor of the plan participant because of the exclusive benefit role. Also included in 404(a) is that fees have to be reasonable for the same reason, to protect plan participants.
So the basic structure of ERISA was built on this very delicate balance between businesses wanting to control their retirement plans and the requirement that they must be fiduciaries acting solely and exclusively in the interests of the participants in those plans?
Yes, that basic trade-off is what resulted in today's ERISA's fiduciary responsibility requirements, which are very complicated but were very exquisitely drafted. These requirements are obviously very stringent. For example, the prohibited transaction rules make you guilty before you get the chance to prove your innocence. Under ERISA section 406 (Title I) and IRS section 4975 (Title II), any transaction between a plan and a party in interest or a disqualified person under the code, anything directly or indirectly--for example, even a service provider receiving money from a plan--is a prohibited transaction, unless you fit into a statutory exemption or a regulatory exemption like a class exemption. One well-known exemption is ERISA section 408(b)(2) which is a statutory exemption to the prohibited transaction rule. We wanted to make sure that anybody working at the employer level--irrespective of a title--that had any discretion or any advisor that had any discretion would be a fiduciary. That's why ERISA section 3(21)(a) is so very broad, utilizing a functional fiduciary test. All these rules--the exclusive benefit requirements, the prohibited transaction rules, the self-dealing rules and others--are incredibly onerous because of all the conflicts that can occur in a retirement plan. Frankly, if these rules were all followed properly, we wouldn't have any Enrons and other such disasters that have devastated plan participants.
What role did labor play in all this?
Labor wasn't involved at all because there was a decision made early on that multiemployer plans, union plans, were so poorly funded and so poorly run that they shouldn't be part of ERISA. In the years prior to the enactment of ERISA in 1974, the decision was made that we just couldn't deal with multiemployer plans because it was bad enough trying to enforce corporate retirement plans! Multiemployer plans weren't subject to the ERISA statute until 1980, when the Multiemployer Pension Plan Act of 1980 was enacted. So it's important to recognize that in the negotiation process of ERISA, we were dealing only with companies not labor unions. In my view, if labor unions had been involved from the get-go in the legislative process in the early 1970s, you probably would have had independent trustees incorporated into ERISA. Because under the Labor Management Relations Act of 1947--also known euphemistically as the Taft-Hartley Act--it was always a rule to have a board of trustees made up of an equal number of labor and management. So if the original ERISA legislation had included multiemployer plans, we probably would have had independent trustees because plans work a lot better with independent trustees. They just do because conflicts are avoided.
Note: I stated mistakenly in last month's column that ERISA was signed into law by President Gerald Ford in the East Room of the White House. The Rose Garden is where the ceremony actually occurred. However, a smaller, more private signing ceremony did take place in the East Room.
My interview with Jeffrey Mamorsky will continue next month.