In the following guest post, James L. Griffith, Jr., of the Reger Rizzo Darnall LLP law firm, takes a look at looming retirement funding problems and the potential liability implications for ERISA fiduciaries. Jim also makes some recommendations on ways that fiduciaries can try to reduce their risk profile. I would like to thank Jim for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Jim’s article.
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INTRODUCTION
Our growing national retirement funding crisis puts—and will keep—ERISA defined contribution (DC) pension plan fiduciaries in the spotlight. As the crisis continues to build, the government and individual plan participants will be critically examining how well fiduciaries manage their retirement plans to help provide retirement income. This article identifies ways that fiduciaries can turn the spotlight around and reduce their risk profile vis-à-vis government enforcement actions and private litigation.
This analysis discusses (1) the retirement funding problems; (2) federal efforts to address the retirement funding problems; (3) why the current federal efforts will not take the spotlight off fiduciaries anytime soon; (4) what being in the spotlight will mean for fiduciaries; and (5) reducing fiduciaries’ risk profiles.
DISCUSSION & ANALYSIS
THE RETIREMENT FUNDING PROBLEMS. Two of the three primary means of funding retirements are in trouble. In general, retirement income is secured through three sources: social security, retirement savings in qualified plans, and personal assets/investments held outside of qualified plans. But trouble looms with respect to social security and retirement savings. With respect to social security, federal government projections tell us by 2033—a scant nine years away—the reserves in the Old-Age and Survivors Insurance (social security) Trust Fund (hereafter, Trust Fund) will be depleted and the continuing program income (FICA taxes) will be sufficient to pay only 77 percent of scheduled benefits.[1] That’s a big 23% hole that people will desperately want filled. With respect to retirement savings, the most recent version of the U.S. Census Bureau’s Survey of Consumer Finances reveals that nearly half of Americans aged 55-65 have not saved anything ($0.00) in a qualified retirement account.[2] The rest of the U.S. population has not done much better. Thus, two of the three means of funding retirements are in trouble.
To add to these difficulties, people are living longer, which means they need their retirement income to last longer. “[I]f you’re married and both you and your spouse are over the age of 65, there’s a 50/50 chance at least one of you will be receiving a [reduced] Social Security check until you’re 90.”[3] Thus, in some cases retirement funds will need to last 20-25 years.
FEDERAL EFFORTS TO ADDRESS RETIREMENT FUNDING PROBLEMS. So far, the federal government has not taken action with respect to the dwindling Trust Fund. However, it has acted with respect to retirement savings in qualified plans. In early 2020, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act (a/k/a SECURE Act 1.0) into law. In 2021, President Biden signed the American Rescue Plan Act of 2021, which included “Special Financial Assistance” provisions to help the Pension Benefit Guaranty Corporation bail out financially troubled multi-employer (union) pension plans at a projected cost of $74-$91 billion.[4] And in late 2022, President Biden signed the Consolidated Appropriations Act (CAA) of 2023, which included SECURE Act 2.0.
The SECURE Acts contain provisions that are designed to foment retirement savings in qualified plans. The Acts: (1) make it easier and less costly for businesses to establish and administer retirement savings plans; (2) require new 401(k) plans to have automatic enrollment features; (3) render long-term, part-time workers (i.e. those that worked 500 or more hours over two consecutive years) eligible to participate in their employer’s retirement plan; (4) allow employers to provide de minimis financial incentives to induce employees to participate in the employer’s plan; (5) provide greater protections for fiduciaries who want to offer guaranteed income contracts (annuities) in their plan offerings; (6) require employers to inform participants in writing how much income their retirement savings will generate; (7) increase the age at which a person must begin to take their required minimum distribution from 70 to 73; and (8) create a “Saver’s Match” program under which the federal government will match 50% of qualifying retirement account contributions of up to $2,000, provided that the individual/couple is financially eligible. The match will be made in the form of a direct deposit into the qualified account.
WHY THE CURRENT FEDERAL EFFORTS WON’T TAKE THE SPOTLIGHT OFF FIDUCIARIES ANYTIME SOON. There are at least four reasons why fiduciary conduct will remain in the spotlight for the foreseeable future.
One, the government still has not come up with a “fix” for the Trust Fund problem—and even if the government acts, any “fix” will likely involve at least some reduction or long-term deferral of social security benefit payments.[5] if social security benefits drop, fiduciaries remain in the spotlight as people will likely look to them to replace what the government failed to deliver.
Two, by their very existence the SECURE Acts keep the focus on private pension plan fiduciaries. The government, acting in response to a perceived retirement funding crisis, identified steps that it believed needed to be taken to boost retirement savings in order to avert the crisis. Fiduciaries and their advisors who fail to implement the SECURE Act provisions risk being targeted by government actors and private litigants.
Three, it cannot yet be determined whether or to what extent the SECURE Acts—even if fully and properly implemented—can foment individual savings, especially for those who are nearing traditional retirement age and have not saved anything. If retirements remain underfunded, expect participants to look for someone to blame (see discussion in next section).
Fourth, there is a current debate as to whether the federal government should eliminate or limit the tax deferral feature of 401(k) plan contributions in order to generate more tax revenue for the debt-strapped federal government and/or to address purported retirement-saving inequities.[6] Some think this proposal, if adopted, will have no detrimental effect on the incentive to save. Maybe. But doesn’t elimination of tax deferrals necessarily leave less to invest and grow, thus undermining the goal of boosting private retirement savings? Fiduciaries and retirement savers may be asked to do more with less.
The spotlight will thus remain on private pension plans and their fiduciaries to deliver prudent opportunities to save for retirement in a complex and shifting environment.
WHAT BEING IN THE SPOTLIGHT MEANS FOR FIDUCIARIES. Fiduciaries should prepare for the following consequences of a retirement funding crisis.
Prepare for Participants to Experience Intense Emotional Responses that Could Foment Litigation. The behavioral economics field gives us principles that suggest the loss of social security benefits will yield strong emotional and/or litigious responses, with the potential for carry-over into the private pension sphere.[7] To summarize why this is likely to occur: (1) individuals—using the status quo as their reference point—tend to view change as either a gain or a loss from the status quo; (2) “[s]ince losses loom larger [people feel them more intensely] than gains, people are generally loss averse”; (3) “[l]oss aversion has an emotional aspect…losses are closely connected to emotions of…pain”; (4) people don’t like to lose the “entitlements they already have” and they don’t want to trade them for alternate entitlements; and (5) “people who incurred a loss are more strongly motivated to seek legal redress than people who failed to obtain a gain.”[8] These principles explain how people are likely to react in the face of a loss, such as a reduction of promised social security benefits. And, if people are predisposed to rejecting alternative “entitlements,” then anything the government or a plan may offer as a “substitute” for lost social security benefits is likely to get the “side eye” from employees. And, if presented with a poorly-performing substitute, well, all the worse for the fiduciaries, as the employees are “strongly motivated to seek legal redress.”
Expect Arguments Based on the Legal Standard that Requires Fiduciaries to Pay Attention to the “Circumstances Then Prevailing.” Fiduciaries have no obligation to take into account the government’s failure to properly manage the Trust Fund when designing and monitoring their plans. But plaintiffs’ lawyers are going to argue that ERISA’s prudence standard imposes such an obligation. ERISA’s prudence standard requires plan fiduciaries to “discharge their duties ‘with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.’” Hughes v. Nw. Univ., 595 U.S. 170, 142 S. Ct. 737, 739 (2022) (quoting 29 U.S.C. §1104(a)(1)(B)). Thus, fiduciaries should expect arguments that the social security funding crisis is a “circumstance” that requires special consideration and handling. We could hear something along the lines of, “The projected social security benefit reductions have been in the news for years… you fiduciaries knew or should have known that participants would need more privately-generated funds/income for retirement, and your response(s) as fiduciaries were imprudent in light of this need.” Plaintiffs will put the “circumstances’ issue into the mix of any 401(k) litigation.
Expect Arguments Designed to Enhance Alleged Victim Status and/or Sympathy for the Participants. You can hear the plaintiffs’ lawyer’s argument. “Here we are, Your Honor, in the midst of the social security crisis, with my clients already getting squeezed by the government’s reduction of benefits, and these fiduciaries decided to nap on the job…”
REDUCING THE FIDUCIARIES’ RISK PROFILE. Some suggestions for lowering the fiduciaries’ risk profile include the following: (1) control the message (advocacy) in and out of the courtroom; (2) make participants aware of the social security funding issues; (3) take actions that foment retirement savings/income; and (4) continue vigilance with respect to selection and monitoring of other investment offerings and administrative services providers. Each is discussed in turn below.
Control the Message (Advocacy) In and Out of the Courtroom. The messaging needs to counter any effort to blame fiduciaries for others’ failures. Proposed messages 1-4 follow:
Message No. 1: ERISA pension plan fiduciaries are not responsible for the funding of the social security system or the impending depletion of Trust Fund reserves. Indeed, fiduciaries would be right to argue that the social security Trust Fund has its own trustees who bear that responsibility. These responsible trustees include the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Social Security Commissioner. To their credit, these trustees have been telling Congress for quite some time that the program will not have sufficient funds to pay promised benefits and that the sooner action is taken, the better—and Congress has yet to act. The message should be that the government—and government alone—is responsible for social security shortfalls.[9]
Message No. 2. Any judgments concerning fiduciary activities during the crisis must reflect the government-led policy decision to put individuals in charge of saving enough for their own retirement. For decades the government has promoted the adoption of defined contribution plans. Indeed, the recent SECURE Acts (1.0 and 2.0) continue to promote the adoption of various types of DC plans. Compared to defined benefit plans, DC plans put more responsibility for preparing for retirement on the individual. Fiduciaries cannot be blamed for individuals’ failures to contribute sufficient funds for their respective retirements.
Message No. 3. Fiduciaries generally are not required to investigate each participant’s financial circumstances or to provide specialized retirement planning advice. See, e.g., Watson v. Deaconess Waltham Hosp., 298 F.3d 102, 115 (1st Cir. 2002) (“fiduciaries need not generally provide individualized unsolicited advice.”); Griggs v. E.I. DuPont De Nemours & Co., 237 F.3d 371, 381 (4th Cir. 2001) (“ERISA does not impose a general duty requiring ERISA fiduciaries to ascertain on an individual basis whether each beneficiary understands the collateral consequences of his or her particular election.”); Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574, 590-91 (7th Cir. 2000) (“ERISA does not require ‘plan administrators to investigate each participant’s circumstances and prepare advisory opinions for literally thousands of employees.’”). Although a fiduciary may have a duty to disclose material facts in certain individualized circumstances, a prerequisite for triggering that duty is that the material facts must be known by the fiduciary but not known by the participant. E.g., Jordan v. Fed. Express Corp., 116 F.3d 1005, 1015 (3d Cir. 1997). But in an un- or under-funded retirement scenario, the participant is certainly aware that s/he has not been saving (enough) money. And, the SECURE Act now requires the plan to examine each individual’s account holdings and to disclose the projected amount of income those holdings will generate in retirement. That disclosure will undermine any claim that the participant did not know what they lacked, and it may protect the fiduciary from claims that additional individualized disclosure was required. In addition, participants also have knowledge of or access to news reports concerning the projected social security benefit reductions. It will be hard for participants to claim that the fiduciaries were aware of facts that the participants were not; correspondingly, it will be hard for participants to impose a duty of disclosure on the fiduciaries based on their unique and individualized situations.
Message No. 4. Generalized data showing that participants have little or nothing saved in a qualified retirement plan, alone, does not prove that fiduciaries knew or should have known their participants were not ready for retirement. Participants may have other assets they intend to use to fund their retirement including side businesses, real estate, expected inheritances, spousal retirement savings, and investments held outside a qualified plan. Again, it is not unreasonable to assume that individual participants knew they were not saving and/or made conscious trade-offs between their current standard-of-living and their standard-of-living in retirement.
Make Participants Aware of the Social Security Funding Issues. Behavioral economics tells us that people may use their expectations about the status quo (rather than the status quo itself) as the reference point for ascertaining a gain or loss.[10] In other words, if people expect their social security benefits will be lower, then they may view the diminishment of their social security benefits as less of a loss and thus have a less intense response. That behavioral economics principle suggests that fiduciaries who assist participants in adjusting their expectations about future social security benefits may be able to lower the temperature in the employee lunchroom. And, it may also have the salutary effect of causing people to save more.
An informal inquiry with the Department of Labor (EBSA) reveals that DOL does not have any standardized disclosure about social security benefit projections or guidance as to how fiduciaries should convey such information to plan participants.[11] If fiduciaries undertake this endeavor, they would be wise to briefly identify the problem, provide links to official government reports, note that the government may yet take action, and explain they may want to consider this information in making their retirement funding (contribution) decisions. Any disclosure should use a matter-of-fact tone and avoid assigning blame.
Take Actions That Foment Retirement Savings/Income. Even though fiduciaries should disavow any responsibility for the social security crisis, it is still in their interest for them to take actions that boost retirement savings and income. These actions might include any or all of the following: (1) add retirement income options to the plan, and, where applicable, take advantage of the SECURE Act safe harbor; (2) talk to investment managers and/or investment advisors about modifying target date funds (TDFs); (3) consider offering participants de minimis financial incentives to induce greater savings, as authorized by the SECURE Acts; and (4) make qualified individuals aware of the savings match program created by the secure acts. each suggestion is discussed in turn.
Add Retirement Income Options to the Plan, and, Where Applicable, Take Advantage of the SECURE Act Safe Harbor. A fiduciary that creates an opportunity for participants to receive retirement income helps rebut an argument that it did not take into account the looming social security issues in managing the plan. In this vein, fiduciaries that select qualified insurers to provide guaranteed (compared to non-guaranteed) income contracts may shield their decisions from liability under the SECURE Act’s safe harbor provisions.
The author recognizes that selecting and monitoring retirement income options may be easier said than done. There are many products out there (e.g., guaranteed vs. non-guaranteed income, in-plan vs. out-of-plan) from which to choose. Fiduciaries thus face a significant learning curve and “comfort level” curve in deciding which one(s) to use. And, with the constant threat of 401(k) fiduciary litigation looming, fiduciaries may hesitate to be the first adopter of a new product. This hesitancy is understandable. A couple of thoughts for the anxious fiduciary: (1) investigate and select guaranteed income contracts offered by qualified insurers, at least as a first step, so as to secure safe harbor protection; (2) consider the potential consequences of failing to offer any retirement income products; and (3) although there are no guarantees that litigation will not arise out of the selection of a retirement income provider, the fiduciary “duty of prudence is not results oriented; it looks for a reasoned process. Prudence does not mean clairvoyance. The duty does not demand a fiduciary—with the benefit of hindsight—make the optimal investment.” Reetz v. Aon Hewitt Inv. Consulting, Inc., 74 F.4th 171, 182 (4th Cir. 2023) (citations and quotations omitted).
Talk to Investment Managers and/or Investment Advisors About Modifying Target Date Funds (TDFs). Fiduciaries should consider whether TDFs should be modified to reflect participants’ desires for extended working years/delayed retirement and potential longevity concerns.
Make Qualified Individuals Aware of the Savings Match Program created by the SECURE Acts. Let the government boost retirement savings.
Consider Offering Participants De Minimis Financial Incentives to Induce Greater Savings, as Authorized by the SECURE Acts.
As always, fiduciaries should evaluate any proposed plan revisions with the duty of prudence in mind.
Continue Vigilance with Respect to Selection and Monitoring of Other Investment Offerings and Administrative Services Providers. Plaintiff-side 401(k) lawyers are not going away. Plan fiduciaries would be wise to adhere to their obligation to monitor and if necessary replace other (non-retirement income) investments that are no longer prudent. See generally Hughes v. Nw. Univ., 142 S. Ct. 737. This obligation is all the more important given the fact that plans will be operating in a hyper-scrutinized environment.
CONCLUSION
The looming retirement financial crisis presents unique challenges for pension plan fiduciaries. Defined contribution plan fiduciaries can manage this crisis and reduce their risk profile by adopting one or more strategies described above.
The author, James L. Griffith, Jr., is a partner in Reger Rizzo Darnall LLP, where he practices in the area of ERISA fiduciary liability. The firm has multiple offices, including Philadelphia, PA, and Wilmington, DE. Jim can be reached at (215) 495-6510 or jgriffith@regerlaw.com.
This article is for general information purposes only and should not and cannot be construed or relied upon as legal advice.
[1] Per the Social Security trustees’ 2023 annual report, “The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, one year earlier than reported last year. At that time [2033], the fund’s reserves will become depleted and continuing program income will be sufficient to pay 77 percent of scheduled benefits.”
[2] Per Black Rock’s Chairman’s annual letter to investors, “When the U.S. Census Bureau released its regular survey of consumer finances in 2022, nearly half of Americans aged 55 to 65 reported not having a single dollar saved in personal retirement accounts. Nothing in a pension. Zero in an IRA or 401(k).” See text at note 24, found at https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter (last visited 4/25/24).
[3] Id. (see text at note 20).
[4] https://www.pbgc.gov/american-rescue-plan-act-of-2021 (last visited 4/25/24).
[5] Why? Under current social security structures the government has three options: (a) raise FICA taxes, which are paid by employers and employees, (b) reduce or delay scheduled social security benefits, and (c) a combination of (a) and (b). Solution (a) is tricky because tax increases are political hot potatoes and have the potential for economy-wide effects. Raising FICA taxes also could be detrimental to the goals behind the SECURE Acts, i.e., if employers and employees are forced to “amp up” their social security contributions, then it may have the perverse effect of reducing employee contributions and/or employer voluntary contributions to retirement savings plans—a “robbing Peter to pay Paul” solution. That leaves (b), reducing or delaying benefit payments. Of course, the government could decide to bolster social security with funding from the Treasury, like it did for union plans under the American Rescue Plan Act. But the government is already in over its head with 35 trillion dollars ($35,000,000,000,000) in debt. The interest payments on that debt ($659 billion in 2023) are already crowding out other government spending (including spending to save social security). A Treasury-funded solution seems risky and perhaps even foolish. In short, social security benefit reductions are likely.
[6] Alex Ortolani, “NAPA Head Warns of 401(k) Revenue Grab by Policymakers,” Plan Sponsor (“The debate over tax offsets ‘is coming regardless of the [election] outcome, regardless of whether it’s Biden or Trump, regardless of whether Democrats or Republicans control the House and the Senate,’ Brain Graff, executive director of NAPA and CEO of the American Retirement Association, said Sunday at the organization’s 401(k) Summit in Nashville.”); Remy Samuels, “Labor Economist Says 401(k) Era Is Ending,” Plan Sponsor (Labor economist and policy consultant Kathryn Anne Edwards “argues that the government should stop subsidizing 401(k) accounts (by making contributions tax-deductible), because she says it uses about 1% of the country’s GDP (in potential, unrealized taxes) to benefit the retirement savings of the wealthiest 25% of Americans.”).
[7] See, e.g., Eyal Zamir, Law’s Loss Aversion (2014) in Eyal Zamir, Doron Teichman (eds.), The Oxford Handbook of Behavioral Economics and the Law (Oxford Univ. Press 2014) (hereafter, Oxford Handbook).
[8] Id. at 270-71, 273, 285.
[9] And we the people share some blame for failing to demand our elected representatives take action and for re-electing those who do nothing to solve the problem.
[10] Oxford Handbook at 270 (“Ordinarily, people take the status quo as the reference point, and view changes from the status quo as either gains or losses (citations omitted), but this assumption is primarily appropriate for contexts in which people expect to maintain the status quo. When expectations differ from the status quo, taking people’s expectations as the pertinent reference point may yield better explanations and predictions of people’s behavior (citations omitted).”).
[11] April 24, 2024 telephone call between the author and a Philadelphia-based DOL/EBSA representative.