What If There Was No ERISA?

New research puts a new twist on “A Wonderful Life” – answering the question, what if there hadn’t been an ERISA?

ERISA is, of course, the Employee Retirement Income Security Act of 1974 which just turned 50. The analysis[i] – put together by Morningstar Retirement’s Director of Retirement Studies Jack VanDerhei and Associate Director of Retirement Studies Spencer Look – first looks at the current “status quo” retirement readiness impact (more specifically, retirement readiness shortfalls). It then looks at the potential result if there had been no ERISA – or, perhaps more precisely if there had been no individual account retirement plans (defined contribution and IRAs), though allowance was made for the probability of saving to an IRA. 

Now, anyone with a realistic assessment/awareness of the limited availability of traditional pension plans in the private sector (before AND after ERISA’s passage) can hardly be surprised to find that the absence of individual accounts would have a significant negative impact. That said, you might be surprised at the size of that impact. 

The research notes that, when aggregated across all four income categories, the probability of Gen X households running short of money in retirement (granted, this is running short by as little as $1[ii]) would increase from 47% under the status quo to 59%. Millennials would fare worse, with the aggregate probability increasing from 44% to 69%, and Gen Z households would see their exposure soar from a risk of 37% in today’s environment to what the researchers termed a “devastating 72%” without individual account retirement plans. 

The paper also projects the outcomes across various income and education demographics, as well as industry, gender and race. To sum it up, single females, Hispanic Americans, and non-Hispanic Black Americans were found to be at a higher risk of retirement shortfalls. Needless to say perhaps – though the paper does – “[t]he elimination of DC participation and savings would drastically reduce the probability of a successful retirement, particularly for middle-income groups, as they heavily rely on these plans.”

Considering the positive impact of those individual accounts – albeit one limited by the status quo reality of access – it should come as no surprise that a projection that greatly broadens that access – alongside automatic enrollment and auto-escalation (as proscribed in the Automatic IRA Act of 2024) notably improves retirement prospects. Indeed, the researchers find that it could substantially improve retirement outcomes, with an aggregate average wealth ratio increase of 23.8% – and that’s assuming an opt-out rate of 30%![iii]   

All in all, just like good old George Bailey, it’s easy to underestimate the potential impact of the individual account regime that ERISA ultimately fostered – until you are able to imagine what things would be like without it. That said, this research affirms the positive impact – and puts some numbers behind it – while also affirming policy considerations for the future. 

Did I hear a bell ringing…

 - Nevin E. Adams, JD 

[i] With a title nearly as long as the paper itself “The Evolution of Retirement-Income Adequacy Under ERISA With a Focus on Defined-Contribution Plans: A Review of the Status Quo, Counterfactual Evidence, and an Analysis of Changes for the Future.”

[ii] Also worth noting, this analysis, unlike most other projection models – takes into account the potential impact of long-term care expenses.

[iii] Which turns out to be close, but less than opt-out rates in a number of the current state-run IRAs.

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