This 401(k) lawsuit showcases the power of a 50-year-old law
A lawsuit brought by Cornell University staff members is the latest to allege that a 403(b) plan is charging excessive fees — and thanks to one law celebrating its 50th anniversary this year, they have the right to challenge that.
In the lawsuit, 28,000 employees at the university claim their retirement plans charge excessive record-keeping fees. The U.S. Supreme Court said earlier this month it will get involved to determine the standards claimants must meet when accusing a company of these sorts of excessive charges after appeals courts could not agree on one, according to a Reuters report.
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Employer-sponsored retirement plans like the 401(k) and 403(b) are protected under the Employee Retirement Income Security Act of 1974, known as Erisa, which laid the groundwork for retirement and health benefits for private-sector workers. Based on the provisions in this law, Americans have saved $14.5 trillion in private-sector retirement plans and pensions, received vital retirement and health benefits and been protected from financial advice tainted by conflicts of interest.
Under Erisa, employers must abide by rules for plan participation and funding and require those who manage retirement assets to be fiduciaries who are obliged to act in the best interest of the participant. Erisa also guarantees some benefits to participants of private-sector defined-benefit plans if those plans are terminated, according to the Department of Labor. Before the law’s passage, standards were not uniform across the U.S., and there were no clear rules for how to administer and protect workers’ retirement savings.
“Employee benefits started to be done through employers, and there were just problems with that system,” said Dan Doonan, executive director of the National Institute on Retirement Security. “Erisa was an effort to say how to make this work for everyone.”
The way Americans save for retirement has changed substantially in the last 50 years, as private-sector employers have moved away from pensions and toward defined-contribution plans, like the 401(k), which put the onus on the worker to save for the future. Americans are also working longer, sometimes because they don’t have sufficient assets to retire, and many are living longer.
“Because Erisa is so critical and fundamental to providing employers certainty that they need to provide benefits, we have really seen an explosion of benefit plans since Erisa passed,” said Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee, or ERIC, a national nonprofit organization. “The idea of private retirement savings being something for everyone is now just part of the fabric of our workforce and the relationship between employers and employees.”
Americans had $11.3 trillion saved in defined-contribution plans like 401(k)s as of the second quarter of 2024, according to the Investment Company Institute. Individual retirement accounts are not protected under Erisa, but with more of the responsibility falling on individuals to save for their futures, these accounts have become critically important. Only about half of American workers contribute to a 401(k) plan, according to the Bureau of Labor Statistics, either because they don’t have access to one or because they think they don’t earn enough to participate. IRAs, meanwhile, are available to anyone with earned income, and such accounts held $14.5 trillion as of the second quarter of 2024, the Investment Company Institute reported. Private pension plans held another $3.2 trillion.
But the differences between IRAs and employer-sponsored plans like 401(k)s illustrate how helpful Erisa can be in protecting and supporting retirement security. Take, for example, transferring money from a 401(k) plan to an IRA — aside from contribution limits, which are lower for IRAs than 401(k) plans, employee-sponsored plans are protected from bankruptcies and creditors, whereas for IRAs, only up to $1.5 million is protected from bankruptcy — including money that was moved from a defined-contribution plan into an IRA.
The Cornell case is one of many lawsuits focused on protecting retirement plans and the assets they hold. Earlier this year, an American Airlines AAL pilot sued the company over its investment decisions, and lawsuits were brought against Bank of America BAC, Intuit INTU and Qualcomm QCOM over retirement-plan forfeitures.
Erisa laid the foundations for the current retirement system in the U.S., but that system still requires improvements, experts say. Perhaps one of the greatest challenges is that many employees still lack access to an employer-sponsored retirement plan, especially workers at smaller businesses. The 401(k) plan has become a common tool for building retirement assets, but it is only one piece in the retirement-income puzzle.
The retirement-savings landscape continues to evolve. In 2019, a major law called Secure was passed, and three years later, Secure 2.0 became law. These bipartisan pieces of legislation made “meaningful improvements to the system,” Banducci said.
Some provisions under the laws include automatic enrollment, which place employees into a retirement plan after they’re hired; tax credits that provide incentives to small businesses to start plans and to lower-income employees to contribute; increasing the age for required minimum distributions; and increasing the amount older workers can save in catch-up contributions.
A potential Secure 3.0 law could include a provision that requires employers with more than 10 employees to enroll workers in an IRA plan, similar to what states have been doing for employees who work at small businesses, according to the National Conference on Public Employee Retirement Systems. The legislation may also create accounts for children under 18, where family and friends could contribute money that would later go toward milestones such as the purchase of a first home or retirement.
Legislators might also look to help retirees spend down the savings they’ve worked their entire careers to build, Doonan said. “We see the industry try to protect its strengths and address its weaknesses.”