How the Employee Retirement Income Security Act of 1974 Delegated Control Over Pension Policy to Private Actors

Governing by Fiduciary: How the Employee Retirement Income Security Act of 1974 Delegated Control over Pension Policy to Private Actors Lauren R. Roth Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Graduate School of Arts and Sciences COLUMBIA UNIVERSITY 2014 © 2014 Lauren R. Roth All rights reserved ABSTRACT Governing by Fiduciary: How the Employee Retirement Income Security Act of 1974 Delegated Control over Pension Policy to Private Actors Lauren R. Roth Approximately one-half of Americans participate in a pension plan offered by their employers and subject to the Employee Retirement Income Security Act of 1974 (ERISA) (Howard 2007, 76). Yet ERISA is frequently ignored by social scientists researching retirement income because of its complexity. Given the enormous amount of foregone tax revenues that support private pensions, the motivating question of my dissertation is: How did the American state change as Congress delegated power over American pension plans to private employers? I argue that a weak system of bureaucratic oversight and the federal courts’ deference to pension administrators allowed fiduciaries to control policy implementation and assume a role traditionally reserved for the state – blurring the line between public and private. My purpose here is to provide an analytical history of ERISA that explores its methods of delegating both policymaking control over and the detailed nuances of administration of private pension plans to private actors. I explore the concept of fiduciary status as a safeguard when government outsources the implementation of policy to private actors. Regardless of whether fiduciary standards have ensured sufficient accountability in the ERISA context – and I find that they have not – I argue that the potential is there and analyze where ERISA went wrong. CONTENTS List of Tables Page ii Acknowledgements iii Dedication iv Introduction 1 Chapter 1 Crafting Fiduciary Relationships: Powers and Duties 26 Chapter 2 Holding Employers Accountable: 48 Congress uses Fiduciary Duties to Protect Employees under ERISA Chapter 3 The Need for Accountability: Decision to Delegate to Private Actors 91 Chapter 4 The Failure of Political Accountability under ERISA 108 Chapter 5 The Failure of Legal Accountability under ERISA 140 Conclusion 174 Bibliography 179 i LIST OF TABLES 4.1 Closed cases that resulted in penalty assessments under EBSA’s programs to enforce ERISA’s Form 5500 Annual Return/Report filing requirement ii ACKNOWLEDGEMENTS I would like to thank the members of my committee – Ira Katznelson, Jeffrey Lax, Robert Lieberman, Gillian Metzger, and Michael Ting – for advancing my dissertation and making me a better political scientist and lawyer during my time at Columbia. Rob spent many hours discussing broad concepts and helping me hone in on the big questions that I wanted to help answer. Without his help, I am not sure I would have made it to this point. Ira has been incredibly generous with his time and picked up right where Rob left off. In addition to providing comments on my work, he has validated my progress at several key points and kept me focused on my ideas in the face of an overwhelming number of (at times, contradictory) comments from other sources. His open-minded pursuit of interesting scholarship that crosses disciplines is inspiring. Mike has been exceptionally quick to respond to all of my questions and concerns, and he never turned down any of my requests for help even though I brought him on board more recently. Any student in the department would be lucky to have the close attention from a mentor that Mike provides. Thanks also to Jeff for helping me develop the first kernel of an idea for my dissertation through the department’s dissertation workshop and to both Jeff and Gillian for participating in my defense. I would also like to thank James Wooten and John Langbein for reading portions of my dissertation and providing comments based on their vast ERISA knowledge and scholarship. Finally, I am grateful for the generous support I have received during my time at Columbia University from both the Graduate School of Arts and Sciences and the Department of Political Science. iii DEDICATION For Josh, whose intellectual curiosity resulted in many lengthy discussions that helped shape this dissertation. As always, your love and support is what allows me to do what I do and be happy doing it. For Jake, who reminded me frequently that my dissertation is not the most important thing in his world and therefore is not the most important thing in my world either. iv INTRODUCTION We have all heard the lament about the decline of defined benefit pension plans. Traditional pension plans have withered, and most Americans – especially those with lower incomes – save little for retirement and rely mainly on Social Security for retirement income. But the vast majority of employees covered by employer-sponsored retirement savings plans such as 401(k)’s do participate, and few without the option to participate in employer-sponsored plans save through alternate vehicles like individual retirement accounts.1 President Obama is working to expand access to and participation in retirement savings plans outside the employment relationship, but the importance of employer-sponsored plans to the American safety net remains. The American welfare state depends heavily on employers to provide their employees with social welfare benefits (e.g., health insurance and pensions). A long emphasis on self-reliance and small government resulted in years of tax subsidies encouraging the connection of welfare benefits to work and a uniquely American path to social security (Hacker 2002).2 Management consultant Peter Drucker called the growth of private pensions an “unseen revolution” and “an 1 Seventy-two percent of those with annual salaries from $30,000 to $50,000 who were covered by an employer plan participated, while only five percent of those not covered by an employer plan saved through an individual retirement account (IRA). Dorning, Mike, and Margaret Collins. “Obama Offering Retirement Savings Plan for Workers,” Bloomberg, January 1, 2014, http://www.bloomberg.com/news/2014-01-28/obama-seen-offering- retirement-savings-plans-for-workers.html. 2 Early research on the importance of public-private linkages in the welfare state showed that private welfare benefits are shaped and subsidized by the government through tools such as tax incentives (Howard 2007; Stevens 1988). These incentives empowered many private actors (i.e., employers, insurance companies, and unions) who now play a key role in the state itself (Hacker 2002). 1 outstanding example of the efficacy of using the existing private, nongovernmental institutions of our ‘society of organizations’ for the formulation and achievement of social goals and the satisfaction of social needs” (quoted in Hacker 2002, 82). Political scientist Jacob Hacker (2002, 82-83), however, sees danger when welfare policy control is located outside government and the path of welfare policy can be changed “through stealth”: “[T]he politics of private pensions is subterranean politics, only occasionally involving a broad circle of participants and resisting the scrutiny that public programs typically invite – even when sizable public resources and recognized national policy goals hang in the balance.” The Employee Retirement Income Security Act of 1974 (ERISA) formalized nearly a century of public-private relationships by regulating systematically for the first time pension promises made by employers to employees (Stevens 1988; Klein 2003).3 ERISA was designed to protect workers from the insecurities of a private pension system while simultaneously encouraging the growth of that private system (Hacker 2002).4 After all, protecting employee expectations of receiving pensions would be meaningless if employers stopped offering pension plans because of onerous regulations. “Based on the sheer number of lives touched, the passage of ERISA is arguably the third ‘big bang’ of the American welfare state” after Social Security and Medicare/Medicaid (Howard 2007). By 1974, nearly 31 million Americans were covered by a private pension plan, and 3 Historian Stuart D. Brandes (1976, 5-6) defines welfare capitalism as “any service provided [by employers] for the comfort or improvement of employees which was neither a necessity of the industry nor required by law.” 4 For a discussion of the 1964 collapse of the Studebaker pension plan for 11,000 of its current and former auto workers, commonly considered the event that sparked the press for pension reform, see Wooten (2001). 2 today, roughly one-half of private workers participate in an employer-sponsored retirement plan (Thompson 2005, 1; Dushi and Iams 2013, 46). A significantly larger proportion of the population receives Social Security benefits. In 2011, 87% of married couples and 85% of non- married individuals aged 65 or older received Social Security benefits.5 Many Americans, however, and particularly the wealthiest, hold the majority of their retirement assets in the form of private pension benefits. While Social Security benefits constituted the major source of total income (at least 50%) for 74% of non-married individual beneficiaries in 2011, they were the major source for only 52% of married beneficiaries, who tend to be wealthier than non-married beneficiaries.6 ERISA governs the enactment and maintenance of private pension plans, including both traditional defined

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