Opinion: ERISA in the Crisis Zone
by James W. Nash of Employee Benefit News, www.benefitnews.com
Whimsical writer P.J. Rourke once said that the mystery is not so much about how Washington works, but about how to make it stop. For better or worse, the financial crisis and ambitious administration will keep Washington working at full speed during this term, and employee benefits professionals need to be prepared for how Congress’ business will affect theirs.
The benefits business is part of an interconnected web that includes banking, insurance, investments and health care.
These sectors face excruciatingly close Congressional scrutiny in the next term.
We already knew health care was facing a long-term funding and organizational crisis, and thus a national debate.
Because of the complex connections between the government and the economy, the health care reform debate may move quickly into a zone of turbulence, that part of an event sequence where events approach something called “the crisis zone.”
We’ve been in this crisis zone before. After 9/11, restraints on basic freedoms were imposed that would have otherwise been unacceptable; after Hurricane Katrina, federal and state officials were expected to accomplish immediate miracles of public spending and relief, and as a result threw billions of dollars at ill-defined problems.
The recent wave of financial bailouts also fits this category, and the New Deal of the 1930s, not thought by all economists to be a good idea, occurred because of the Depression crisis. So now, after the biggest financial meltdown in memory, we can expect Washington – especially with a new administration in place – to use this crisis as a license to enact legislation which may be ill-considered and more reflective of a loose crisis atmosphere than of real need. That is what happens in the crisis zone.
In the employee benefits sector, seemingly removed from the catastrophic bank and stock crisis, the crisis zone still has yielded proposals like:
Additional restrictions on 401(k) plans.
A universal thrift plan that would severely erode the traditional 401(k).
A universal health care system which would impose greater health care costs on employers, crowding out retirement and other benefit expenditures. This could possibly include mandated benefits.
It could ultimately involve universal Medicare coverage or a government entity for the uninsured, obviously to be accomplished by increased payroll and income taxes.
A major employee benefits debate would result in another nasty clash between traditional antagonists. We still have those who would support the old paradigm of equilibrium – the same people who have tried but failed to prevent continued innovation in employee benefits, as opposed those who have developed and promoted more flexible approaches.
Further, old antagonisms about tax deferral, tax exemptions and methods of funding remain important.
In the retirement area, the defined benefit plan may have lost its ascendancy, but those who have long opposed the 401(k) concept still are opposed to it.
However, it is both a popular and highly defensible wealth-accumulation device that gives people a sense of empowerment over their financial future. Account losses may have caused the most angst in recent months, but remember, the huge recent losses occurred in the stock market, not in the 401(k) as such.
Still other reasons exist for animosity toward the 401(k). It was developed by entrepreneurial pension consultants for smaller businesses. In its original form, the salary reduction plan, effectively frozen by ERISA, was also a vehicle for selling life insurance, partly because it was the most practical available funding device for a small employer. So it has been naturally suspect from the beginning by certain segments of Congress.
Yet, Congress has continued, because of pressure from constituents, to approve new retirement instruments.
Congress should approach employee benefits funding issues with caution. Right now, in this zone of uncertainty, things could get out of control and anything could happen. Everything could be on the table, if not the chopping block.
