The Limitations of Retirement Plan Law

Abstract

It is widely believed that employers determine whether or not their employees receive retirement benefits and the type and amount of any benefits that are received. This belief is mistaken. While sponsorship of a retirement plan is a voluntary choice on the part of the sponsoring employer and the sponsoring employer directly controls the type of plan and the level of benefits provided, the employer's choices on these matters are controlled by its employees' preferences for different forms of compensation. In order to attract and retain the best workers, an employer must spend the funds available for employee compensation so as to provide its employees with those forms of compensation that the employees value most highly. An employer includes retirement benefits in its employees' compensation packages when the employees prefer those benefits to other forms of compensation. In addition, in the long run, employees bear the costs of their retirement benefits. These facts mean that employees receive the retirement benefits that they want and are willing to pay for. This conclusion undercuts the foundation of much of the law that regulates employees' retirement benefits, which includes the Employee Retirement Income Security Act (ERISA) and portions of the Internal Revenue Code. In general, these laws are intended to enhance the quality of retirement benefits and to increase the levels of retirement benefits received by employees, particularly by nonhighly compensated employees. These laws attempt to accomplish these purposes by requiring that retirement benefits be provided on certain specified terms and by reducing the income tax liabilities of employees who receive compensation in the form of retirement benefits. Mandatory enhancements in the quality of retirement benefits increase the costs of the benefits; since employees must pay for this enhanced quality, fewer employees, especially lower-paid employees, pay for and receive retirement benefits. Therefore, qualitative regulation of retirement benefits tends to restrict the benefits to higher-paid employees. As presently structured, the tax incentives do little to provide retirement benefits to nonhighly-compensated employees. Revisions to the present structure, such as requirements for broader employee participation, faster benefit accrual, more rapid vesting, and larger benefit allocations for nonhighlies, are frequently proposed; these proposals are intended to increase the benefits received by nonhighlies. However, when such proposals are considered in light of the fact that ultimately employees receive the retirement benefits that they are willing to pay for, it becomes clear that they will generally have the perverse effect of decreasing the retirement benefits of nonhighlies. In a voluntary retirement plan system, legal rules cannot compel employees to buy more and better retirement benefits than they want. The foundation of ERISA and the retirement plan provisions of the Code is fundamentally unsound.