were lightly staffed. The national savings rate was 10 to 12 percent - PDF document

VOL. 23, NO. 2 SUMMER 2010 B ENEFITS L AW JOURNAL From the Editor Employee Benefits Tea Party ver the past 30 years employee benefits have experienced a tre- O mendous upswing in regulations and a downturn in participa- tion and benefits. This is not a coincidence. Heaping well-intended rules on top of each other has produced a cacophony of regulatory nonsense. Even worse, endless regulations have added to employer costs, uncertainty and risks, draining the resources employers would otherwise have devoted to benefits. To promote benefits cover- age we need a Tea Party–like movement to remove government regulation. The rise and fall of defined benefit pension plans shows per- fectly the bell curve effect of the government’s regulatory approach. In the dark days before ERISA, disclosure and fiduciary standards were virtually nonexistent and there were a handful of mostly tax- related rules, such as mandatory vesting at age 65 and a modicum of funding requirements. The result was that many would-be retirees discovered too late that their employer-provided pension was an empty promise. (The current $1 trillion shortfall in state and local retirement and health benefit funding also illustrates why some rules are needed.) ERISA imposed some much-needed order and fairness in the benefits marketplace. After a brief period of upheaval as the various players sorted things out, we arrived at a “regulatory state of repose” where pension plans thrived and employees generally received the benefits promised. By 1980 the “traditional” pension plan was the retirement program of choice. Summary plan descriptions were short and practically readable. Although employers did most of the heavy lifting for their employees, corporate HR and benefit departments

From the Editor were lightly staffed. The national savings rate was 10 to 12 percent without any encouragement from the still-to-come 401(k) plan. Company-sponsored health programs, including a sizable measure of retiree health, were common place. But ERISA was not perfect and occasional abuses slipped through its cracks. Sometimes workers were misled or unfairly denied ben- efits. Sometimes an employer (the early cases frequently seemed to involve doctors) found a way to abuse the system to grab an extra helping of benefits or an oversized tax deduction. Sometimes other stuff went wrong, like a participant choosing a single life annuity, leaving his widow pensionless. With each inequity or perceived abuse Congress stepped in with legislation to “fix the problem.” As new political leaders came to power and heard a one-off story of a constituent who was treated unfairly by a plan administrator, they had to do something too. Indeed, starting with the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982, Congress passed a steady stream of legislation that the Internal Revenue Service and the Department of Labor turned into a torrent of new regulations. There were top-heavy, affiliated service group, employee leasing, and anti-individual retirement plan rules to keep the doctors and other professionals in check; excise taxes to punish companies that were able to successfully manage their pension investments and wanted to remove excess funding from their plans; even greater excise taxes and penalties to punish employers that were not able to successfully manage their pension funding; and Byzantine annuity and distribution rules to ensure that participants properly considered how to withdraw their benefits and didn’t wait too long or start too early, to name just a small selection. The urge to improve was particularly irresistible when it came to curtailing benefits for higher-paid employees. The maximum benefit limits were reduced, allowed to rise for inflation, and then reduced again; compensation ceilings were imposed; and discrimination tests were added, strengthened, and then modified. Many of these changes came with grandfathering and “fresh-start” transition rules that would cross an actuary’s eyes. Thirty years of well-intended improvements have made things worse. Today, pension plans are dinosaurs being replaced by 401(k) plans and the national savings rate sputters along at a paltry 3.3 percent. Pension plans became personally less important to manage- ment and other corporate decision-makers but with reduced upside for a well-funded or overfunded plan and huge downsides for an underfunded plan. Compliance is expensive and mistakes are more frequent. HR and benefits personnel must constantly learn new BENEFITS LAW JOURNAL 2 VOL. 23, NO. 2, SUMMER 2010

From the Editor rules—and sometimes forget old ones. Participants are confused and frequently don’t recognize the value of their benefits. It’s just easier on management and the bottom line for companies simply to switch to a 401(k) and let employees do some of the heavy lifting—or to forget the whole thing and pay higher salaries with no benefits. Along the way, employer-provided health coverage became an expensive “right” that was denied to many and retiree health benefits evaporated even faster than pensions. A similar regulatory effect has played out in executive com- pensation, except that in place of a bell curve there is an esca- lating line. In response to a growing perception that corporate boards, large shareholders, and the like weren’t doing their jobs in regulating pay, Congress passed golden parachute excise taxes; limits on perks and freebies; limits on deductible compensation; stock option standards; oodles of governance and shareholder disclosure rules; and the Mother-of-all deferred compensation laws. But rather than curb the size of executive compensation packages, every ceiling on pay turned into a minimum standard and new rules encouraged additional forms of compensation. Today, 1980s-style executive compensation programs look paltry in comparison. The key “marker” of unnecessary regulation is look for areas where legislative reforms have failed. It’s not because the politicos didn’t make sufficient changes or take the “right” approach. It’s that the problem being fixed wasn’t suitable for a legislative solu- tion. The lesson is that any man-made system of regulation will be imperfect and that we must accept a certain level of unfairness and system abuse. The Tea Party solution would require a reexamination of com- pensation and benefit regulations to determine what’s really need- ed. Recognize that employees are adults, and business managers are employees too and that, while most people aren’t stupid, everyone does stupid things once in a while. And acknowledge that no one except lawyers and lunatics reads any document lon- ger than a page or anything written in CAPITAL LETTERS. Then tear up every law and regulation that cannot be shown to be necessary. I’ve ignored the health care elephant in the room. Long lag times between writing and publication makes it impossible to speak of the obvious ills surrounding overregulation of employee health benefits. As we go to press, it seems that we’ll have 3,000 pages of new health laws with tens of thousands of pages of regulations to follow. But with the publisher beckoning, I am forced to punt on health benefits until the regulatory flood waters crest . BENEFITS LAW JOURNAL 3 VOL. 23, NO. 2, SUMMER 2010

From the Editor Either way, please pass the crumpets . . . and perhaps some bourbon. David E. Morse Editor-in-Chief K & L Gates, LLP New York, NY Reprinted from Benefits Law Journal Summer 2010, Volume 23, Number 2, pages 1-3, with permission from Aspen Publishers, Inc., Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com Law & Business BENEFITS LAW JOURNAL 4 VOL. 23, NO. 2, SUMMER 2010