Celebrating 50 Years of ERISA

A Conversation with Radil and Clatterbuck

The Employee Retirement Income Security Act of 1974 (ERISA) was signed into law by President Ford on Labor Day, September 2, 1974, nearly 50 years ago to the day!  While a number of historical events drove Congress to consider greater protections for employee benefit plans, it is said that the failure of the Studebaker automobile manufacturer was the true impetus for ERISA.  When the Studebaker company closed its plant in 1963, its pension plan was so poorly funded (in no small part due to the fact that Studebaker borrowed from its pension fund to help keep the struggling company afloat) that nearly 4,000 employees received only a portion (or in many cases, none) of the pension dollars they had been promised.  After years of hearings and listening to citizens’ concerns, ERISA was born.

In honor of this milestone birthday, we interviewed Baird Holm’s very own “ERISA historians,” Gary Radil and Gary Clatterbuck, about ERISA’s history, evolution, and impact on the benefits landscape.  We also discussed with them our thoughts on the future of ERISA.

Radil’s Benefits Practice Pre-ERISA

Gary Radil started practicing at Baird Holm in 1967.  Radil told us that before ERISA, he would draft a plan document then head to the Federal Office Building, and the local IRS representative – Ed Vacovsky – would review the plan and offer in-person feedback on the document before providing his approval letter.  (Before ERISA, retirement plans were governed only by tax rules.)  

Of course now, the approval process for an individually designed plan is done with an electronic filing using an IRS-approved form.  Further, the majority of plans are no longer even individually designed.  Instead, prototype plans – with IRS approval letters included – dominate the market.  And local IRS agents?  No longer a thing.

Radil recalled a couple of “unique” pre-ERISA plans…one of which used the pension fund as an operating reserve, taking money out as needed for operational expenses; and another which only permitted benefits for employees who were employed with the company at age 65.  Now, neither of these plan features would even remotely pass muster.

ERISA Required “Massive” Change for Radil and Baird Holm Clients

Radil says, “And then here comes ERISA and, you know, this thing was a massive change. . . a revolutionary thing. . . and the thing is, there was no ‘de minimis’ provision for small employers.”  Shortly after ERISA was passed, Radil spoke with one of the key legislative drafters and asked if they had considered small companies when drafting, and he had replied: “Oh yes, we looked at small companies!  We looked at companies that were as small as 500 employees.”  At the time, many of Baird Holm’s clients had fewer than 500 employees, so our clients (and Radil) found the changes required by ERISA particularly burdensome, requiring total restatements of each plan to ensure compliance and adopt the new vocabulary.

As a result of the new complicated requirements under ERISA, Radil explained that many of our clients terminated their defined benefit plans altogether.  This trend has continued since 1974, and today, defined benefit pension plans sponsored by private employers are nearly all either frozen or terminated.

Radil showed us his ERISA “book,” which is the original legislation printed and bound.  Meanwhile, Baird Holm’s current ERISA team enjoys a 9-volume ERISA “Outline Book”[1] to assist in its daily benefits practice.

Clatterbuck Joins the Fray

Clatterbuck started practicing in 1980 but did not really dive into ERISA until about a year later: “I kind of wanted to throw up in my shoes when Radil told me I had to start working on ERISA plans.”  He went to “pension school” in Boston during the summer of 1981, where he got his first taste of ERISA before becoming the expert we all grew to know and love.

Radil and Clatterbuck humored us with several stories of late nights and weekends worked in December, drafting updated plan documents for each of our clients before year-end.  Clatterbuck told us the majority of his practice was related to “heavy drafting work” for defined benefit “pension” plans and remembered struggling with many of ERISA’s ambiguities, including:

• Constructive receipt – initially, to avoid constructive receipt tax issues (and before additional guidance was issued), a participant was not permitted any options related to their benefit: it was simply paid out in an annuity upon retirement.
• The (initial) absence of QDROs (qualified domestic relations orders) – ERISA protects benefits from alienation, assignment, and creditors, but how did an employee’s divorce decree, demanding a portion of the benefit go to their ex-spouse, apply?
• Drafting and administering valuations – before there were daily valuations of investments, Clatterbuck explained the investments were valued maybe twice a year, but mostly once a year, at year-end. The plan document accordingly had to carefully define when and how the valuations would be performed, and benefit calculations were only done once or twice per year!
• Years of service and breaks in service administration – the concept of 1,000 hours of service was brand new, so employers had to learn how to keep track of their employees’ hours. Now, there is comprehensive technology (and third-party administrators) to help employers with this tracking obligation.

Prohibited Transactions and Fiduciary Duties

Other brand-new concepts were ERISA’s strict fiduciary duty rules and its prohibited transaction rules.  Before ERISA, the lines were blurry – particularly for investment advisors – but ERISA’s prohibited transactions drew the lines straight and dark, causing confusion and frustration among advisors.  For more information about ERISA’s fiduciary duties, please see our article here.

ERISA Applies to Health and Welfare Plans, Too?

The primary focus initially was on retirement plans, and Clatterbuck admitted that health and welfare benefit plans were – for many years – basically ignored from an ERISA standpoint.  Only later did practitioners fully appreciate that ERISA extended broadly to health and welfare benefit plans, and that Forms 5500 should be filed for those plans, too.  Today, an upswell in ERISA litigation related to health and welfare plans is currently under way.

Clatterbuck’s Practice Evolves

Clatterbuck told us his practice became more and more focused on ERISA and benefits-related matters while Radil started to slowly distance himself (focusing instead on estate planning and tax-related matters).  Radil said, laughing: “There is truth to that!”

Clatterbuck explained that as the benefits industry grew, his work transitioned from heavy drafting of individually designed plans to more day-to-day compliance issues with prototype plans and, when it came to heavy drafting, nonqualified deferred compensation arrangements.  Clatterbuck did note that he drafted some “master plans” himself – along with individually designed plans – before the third-party administrators (and their prototype plans) really took hold in the market.

As Clatterbuck neared the end of his career (he retired in 2021), he noticed a steady increase in fiduciary litigation, particularly regarding investment-related decisions under qualified retirement plans.  Radil quipped, “The plaintiff’s bar is always later to come to the party, but they will be there.”

Benefits of ERISA

We asked what Clatterbuck and Radil saw as some of the benefits of ERISA.  Clatterbuck noted that one of ERISA’s greatest benefits from an employer’s perspective is that it serves as an effective defense.  While employers are subject to strict fiduciary duties under ERISA, the anti-assignment rules and court-granted employer deference in connection with employee claims were significant benefits to employers in protecting not only the plan’s benefits, but an employer’s fiduciary decisions.

Further, state law claims were no longer valid – and were easily defended – in light of ERISA’s preemption of state laws.  And the limitation on types of damages (restricting consequential and punitive damages) was also a significant benefit to employers.

What Would They Have Done Differently?

If Clatterbuck and Radil had been involved in ERISA’s drafting, they would have made some changes.  Radil says he would have made an exception for small employers, to avoid the “atomic bomb”[2] that was dropped on them when ERISA was passed.

Clatterbuck questioned the constitutionality of certain aspects of the Multiemployer Pension Plan Amendments Act (MPPAA) and Pension Benefit Guaranty Corporation (PBGC), which requires employers of defined benefit pension plans to pay premiums and bear new legal responsibilities to ensure employees are paid their promised benefits.  When these additions to ERISA were enacted, they retroactively imposed draconian withdrawal restrictions, new funding liabilities, and premium requirements upon employers for plans that had been in effect before ERISA’s effective date.  Was this a prohibited “takings” under the Fifth Amendment of U.S. Constitution?  We think this is a great question for a law student…as far as we know, this hasn’t been challenged!

ERISA’s Future – Where do We Go from Here?

ERISA continues to grow and evolve.  For example, the SECURE Act of 2019 and SECURE 2.0 Act of 2022 were both the most expansive pieces of retirement-related legislation since ERISA, and the Affordable Care Act of 2010 significantly reformed – and continues to reform – the landscape of group health plans.

Jeremy explained that the biggest difference in his 13 years of practice (other than the Affordable Care Act) has been the elimination of the IRS’s determination letter process for individually designed plans.  Jeremy said that prior to this change, the filing process, along with the required plan drafting, each year made up nearly half of his practice.  Meanwhile, Morgan – who started practicing in 2017, right as the IRS terminated its program – has never submitted a determination letter filing (except for terminating plans).

So what do we see for ERISA’s future?  Immediately, we see that fiduciary litigation has shifted to include not only qualified plans, but also now 403(b) plans, and that it has particularly exploded recently for health and welfare plans. 

The litigation on health and welfare plans has focused on expenses for Pharmacy Benefit Managers (PBMs) and drug prices, and on plan fiduciaries not doing their due diligence when selecting their service providers and pricing.  We’re advising clients to set up fiduciary committees, trainings, and structures for their health and welfare benefit plans similarly to what is already in place for their retirement plans.  It will be interesting to see whether the plaintiff’s bar is able to effectively apply these fiduciary theories to self-funded plans with no plan assets held in trust.

Regardless of where ERISA goes, you can trust that Baird Holm – and your Baird Holm benefits team – will be here, continuing to evolve and grow as ERISA does.