Are Two Employers Better Than One? An Empirical Assessment of Multiple-Employer Retirement Plans

At least 50% of Americans have not saved enough for retirement. This is in part due to a lack of access to employer-sponsored retirement plans. Nearly a third of the U.S. workforce is employed by businesses that choose not to sponsor workplace retirement plans for their employees. Moreover, plans set up by smaller employers tend to be plagued by high fees that eat away at retirement savings. To increase worker participation in low-cost retirement plans, lawmakers across the political spectrum have coalesced around reforms to allow more small employers to pool their assets and to centralize plan administration through multiple-employer plans. The efforts culminated in 2019 with the passage of the SECURE Act, which dramatically expanded access to multiple-employer plans. This Article shows that the bipartisan enthusiasm for expanding multiple-employer arrangements rests on shaky theoretical and empirical considerations. Drawing on newly hand-collected data for multiple-employer plans in effect prior to 2019, it argues that overlooked agency costs, market opacity, and the limits of the fiduciary governance regime have undermined the gains from asset pooling and centralized plan administration in existing multiple-employer plans. Furthermore, while larger single-employer plans typically leverage economies of scale and greater bargaining power to reduce plan fees, the benefits of plan size have not mapped directly onto existing multiple-employer plans. Instead, the Article reveals that total plan fees for existing multiple-employer plans are significantly higher than the fees for single-employer plans of comparable size. As policymakers and regulators implement expanded access to employer-pooling arrangements, this Article proposes governance measures to realize the full potential of aggregation for retirement savings programs in the United States

Argument analysis: Justices skeptical of claim that retirement-plan participants have “actual knowledge” of all facts included in disclosure documents

The Supreme Court heard oral argument on Wednesday in Intel Corp. Investment Policy Committee v. Sulyma, a case that puts a spotlight on the disclosures that retirement plans provide to plan participants. Under the Employee Retirement Income Security Act of 1974 (ERISA), participants in employer-sponsored retirement plans have the right to challenge the prudence of decisions that plan fiduciaries make about the investment options available through the plan. ERISA sets time limits for bringing such suits. Section 413(1) of ERISA gives plaintiffs six years after the end of the fiduciary breach, violation or omission. Section 413(2) imposes a shorter three-year limit when a plaintiff has “actual knowledge” of the breach or violation. In that case, the clock starts on the earliest date on which the plaintiff had “actual knowledge” of the breach or violation. The question before the court was whether the three-year limit in ERISA Section 413(2) bars suit when the defendant – here the committees and individuals at Intel responsible for administering the retirement plans – disclosed the relevant plan information about the plan investments to the plaintiff more than three years before the plaintiff filed the complaint, but the plaintiff chose not to read or could not recall having read the information

The New Fiduciaries

The regulation of employer-sponsored retirement plans in the United States relies on fiduciary standards drawn from donative trust law to regulate the conduct of those with authority or discretion over plan assets. The mismatch between the trust-based fiduciary framework and the rights and interests of employers and employees has contributed to the high cost of pension fund investing and the significant gaps in pension coverage in the private sector. In recent years, state and local governments have stepped in to reduce the retirement coverage gap by creating state-facilitated retirement savings programs for private-sector workers who lack access to employment-based coverage. In 2019, five states—including California, Illinois, Massachusetts, Oregon, and Washington—had programs open to participants. This Symposium Essay shows that while the five programs vary in the roles and responsibilities imposed on state actors and on the participating employers, there is a notable shift away from traditional fiduciary obligations as the primary constraint on the conduct of plan administrators, particularly with respect to plan fees. In a stark departure from the regulatory regime for plans sponsored by private-sector employers, several states impose explicit caps on total fees that may be charged to plan participants. Furthermore, while in some cases, the fee caps are paired with traditional fiduciary obligations for state administrators, in other cases the statutory provisions make no mention of fiduciary duties. The Essay presents the benefits and the risks of the new regulatory approaches and outlines a research agenda to assess the effectiveness of fee caps as either a complement to or substitute for existing fiduciary-based regulatory frameworks. The findings from the state experiments in retirement plan governance will offer important insights to policymakers seeking to improve retirement security in the United States

Trusts No More: Rethinking the Regulation of Retirement Savings in the United States

The regulation of private and public pension plans in the United States begins with the premise that employer-sponsored plans resemble traditional donative, or gift, trusts. Accordingly, the Employee Retirement Income Security Act of 1974 (ERISA) famously “imports” major principles of donative trust law for the regulation of private employer-sponsored pension plans. Statutes regulating state and local government pension plans likewise routinely invoke the structure and standards applicable to donative trusts. Judges, in turn, adjudicate by analogy to the common law trust. This Article identifies the flaws in the analogy and analyzes the shortcomings of a regulatory framework that, despite dramatic changes in the nature of modern pension benefits, still regards employees as gift recipients, grants both settlor and trustee rights to employers, and relies increasingly on trust-based fiduciary obligations to prevent employers from prioritizing the interests of their non-employee stakeholders over the interests of pension plan participants. Today, the mismatch between the trust-based legal framework and the parties’ rights and interests has contributed to the high cost of pension fund investing, the significant gaps in pension coverage, and the underfunding of public pension plans. As such challenges force U.S. policymakers to reconsider how and how much Americans save for their retirement, this Article shows that long-term retirement security for U.S workers requires a fundamental reevaluation of the employer, employee, and government roles in the provision and management of retirement assets

Trusts No More: Rethinking the Regulation of Retirement Savings in the United States

The regulation of private and public pension plans in the United States begins with the premise that employer-sponsored plans resemble traditional donative, or gift, trusts. Accordingly, the Employee Retirement Income Security Act of 1974 (ERISA) famously “imports” major principles of donative trust law for the regulation of private employer-sponsored pension plans. Statutes regulating state and local government pension plans likewise routinely invoke the structure and standards applicable to donative trusts. Judges, in turn, adjudicate by analogy to the common law trust. This Article identifies the flaws in the analogy and analyzes the shortcomings of a regulatory framework that, despite dramatic changes in the nature of modern pension benefits, still regards employees as gift recipients, grants both settlor and trustee rights to employers, and relies increasingly on trust-based fiduciary obligations to prevent employers from prioritizing the interests of their non-employee stakeholders over the interests of pension plan participants. Today, the mismatch between the trust-based legal framework and the parties’ rights and interests has contributed to the high cost of pension fund investing, the significant gaps in pension coverage, and the underfunding of public pension plans. As such challenges force U.S. policymakers to reconsider how and how much Americans save for their retirement, this Article shows that long-term retirement security for U.S workers requires a fundamental reevaluation of the employer, employee, and government roles in the provision and management of retirement assets

Opinion analysis: Justices unanimously side with retirement-plan participant in plan reading of actual knowledge

In October of 2015, after Christopher Sulyma, a former Intel employee, sued Intel’s plan fiduciaries for imprudently managing the retirement plans sponsored by the company, Intel moved to dismiss the complaint as time-barred under Section 413(2) of the Employee Retirement Income Security Act of 1974. Section 413(2) of ERISA imposes a three-year limitations period from the earliest date on which the plaintiff “had actual knowledge” of the alleged fiduciary breach. The three-year window under Section 413(2) shortens the six-year period that otherwise runs from the end of the fiduciary breach, violation or omission. During the years that Sulyma was a participant in the Intel plans, Intel (used here to refer to the petitioners, which include Intel’s investment committee, administrative committee and finance committee) provided directly, or made available on a website, various disclosures about its retirement plans. These disclosures included information about fund investment allocations, including the allegedly imprudent allocation to “alternative” investments in hedge funds and private equity. Sulyma accessed some of the materials, but testified that he was not actually aware three years before filing suit that his retirement accounts were invested in hedge funds and private equity. The district court ruled that based on the disclosure documents provided by Intel, Sulyma had actual knowledge of the relevant facts more than three years before filing suit. The U.S. Court of Appeals for the 9th Circuit reversed, holding that the phrase “actual knowledge” means that “the plaintiff is actually aware of the facts constituting the breach, not merely that those facts were available to the plaintiff.” In a unanimous decision written by Justice Samuel Alito, the Supreme Court agreed, holding that a plaintiff does not necessarily have actual knowledge of the information contained in disclosures that he receives but does not read or cannot recall reading. To satisfy the actual knowledge requirement, the plaintiff must “in fact have become aware of that information.

“Professional” Employers and the Transformation of Workplace Benefits

Workers in the United States depend on their employers for a host of benefits beyond wages and salary. From retirement benefits to health insurance, from student loan repayment to dependent-care spending plans, from disability benefits to family and medical leave, U.S. employers play a uniquely central role in the financial lives of their employees. Yet not all employers are equally willing or capable of serving as such financial intermediaries. Larger employers commonly offer more and better benefits than smaller employers. In recent years, so-called Professional Employer Organizations (PEOs) have pitched themselves as a private-sector solution to the challenges traditionally faced by smaller employers. PEOs have pioneered and marketed a “co-employment” model pursuant to which a business and the PEO agree to share certain employer rights and responsibilities, with the PEO taking on all of the human resources matters and the client-employer otherwise retaining control over the business. While PEOs respond to long-standing challenges faced by smaller employers and have the potential to increase access to workplace benefits, this Article argues that they also introduce new and significant governance concerns that are not adequately addressed by the existing regulatory framework. Empirical evidence suggests that as currently structured, PEOs may not, in fact, provide “Fortune 500” benefits to employees at smaller companies and may instead lock participating employers into costly benefit bundles and expose them to the risk of unpaid employment taxes and health insurance claims. To protect participants in arrangements where PEOs provide key workplace benefits, this Article recommends strengthening and uniformly applying registration, disclosure and oversight requirements for all non-employer intermediaries, including PEOs. In the longer term, comprehensive retirement reform is needed to account for the transformation of workplace benefits in the United States

Healthcare Promises for Public Employees

State and local governments have promised nearly $1 trillion in retiree healthcare benefits to public employees. Although retiree healthcare benefits represent a form of compensation, historically, state and local governments have not set aside any money to pay for the promised benefits. Compensating employees with promises of future benefits has enabled state legislatures to use public dollars for other priorities, while ignoring the growing liabilities associated with the healthcare promises. As these liabilities have come due, they have strained state and local budgets. Some public employers have simply cut the benefits, and public employees have had limited recourse to hold cities and states to their original deal. At the same time, many public employers have actually begun to pay down their unfunded liabilities for retiree healthcare. In 2004, new disclosure requirements forced state and local governments to acknowledge the full scope of their commitments for post-employment benefits. By 2015, some 35 state legislatures had created irrevocable trusts to set aside assets for benefits due in future years. However, while some of the trusts—most notably some that cover state legislators and judges—have accumulated assets to cover the liabilities, other trusts have remained glaringly empty. Using newly collected data on over 100 state-administered retiree healthcare plans, this Article shows that stronger constraints on legislative control over funding decisions, as well as stronger measures of fiscal health at the state level, have been associated with better funding progress. Ultimately, this Article contends that although the trend toward prefunding is encouraging, the current legal framework regulating retiree healthcare benefits impedes serious funding efforts. Disclosure requirements and governance reforms can promote funding discipline and mitigate uncertainty in the short term. In the long term, any significant resolution requires a deeper rethinking of employer promises for post-employment healthcare benefits and of the institutions best suited to manage such promises for decades to come

Funding Discipline for U.S. Public Pension Plans: An Empirical Analysis of Institutional Design

Using newly collected data on over 100 state-administered pension plans, this Article shows that previously overlooked differences in institutional design are associated with the striking variation in funding discipline across U.S. public pension plans. As state and local governments grapple with unfunded pension obligations, this Article presents a timely examination of public plan governance across two key dimensions: the allocation of control over funding decisions and the transparency with respect to funding liabilities. It shows empirically that greater constraints on legislative control over funding decisions—typically through the delegation of control to pension-system boards—have been associated with better funding discipline. Conversely, liability-pooling arrangements that have shrouded individual employer responsibility for underfunding have been associated with worse funding discipline. These findings should inform current reform efforts to address the multi-trillion dollar shortfall in pension funding. To date, such state and local government efforts have focused primarily on scaling back benefits for public employees but have overlooked the role of institutions in explaining why some public employers have consistently contributed to the pension funds while others have failed to set adequate contribution rates or have withheld promised funds

Accounting and the ACA: New Choices and Challenges for Public Sector Retiree Health Plans

Most state and local governments provide employer-sponsored healthcare benefits to their retirees. In recent years, the Affordable Care Act and accounting changes adopted by the Governmental Accounting Standards Board have introduced new choices and challenges for public employers. As state and local governments look to reduce their unfunded retiree healthcare obligations, some have created dedicated trusts to take advantage of the immediate accounting benefits and the long-term savings that prefunding offers, while others have chosen to shift retirees onto the newly available public exchanges. In light of the new regulatory requirements and the evolving case law on plan modification, this article reviews the changes to the form and financing of retiree health benefits. The analysis suggests that in the long term, the expanded access to health insurance through the public exchanges, the federal subsidies upheld by King v. Burwell, and the prefunding efforts spurred by the new accounting rules should leave participants and taxpayers with greater clarity about the security and the cost of post-employment benefits