Origin of ERISA

The first employer-sponsored retirement plans were established in the late 19th century, primarily in the railroad industry and among a few large industrial employers. Pension benefits were regarded as a gift from the employer in recognition of long and faithful service. Of these early arrangements, many were inadequately funded and ultimately were terminated.

In the 1920s, shortly after the adoption of the federal income tax, Congress accorded "qualified" retirement plans special tax-favored treatment that has continued to the present. As income tax was very low, the considerations provided an employer with little tax incentive to establish and maintain a qualified retirement plan.

The development of employee pensions was temporarily thwarted by the Great Depression. Thereafter, in 1935, Congress passed the Social Security Act, which established a basic level of retirement income protection. Other legislation added numerous specific requirements governing qualified plans. If a plan satisfied the requirements for tax qualification, the employer could tax deduct, within certain limits, its contribution to fund the plan. Earnings on plan assets were tax-exempt, and a participant was not taxed until a benefit was actually received by the participant. Many retirement programs merely supplemented the benefits provided by the Social Security system, i.e., the tax laws allowed an employer to "integrate" or "offset" Social Security benefits (funded in part by employer paid payroll taxes) against employer provided retirement benefits as long as the combined result of the two types of pensions did not discriminate in favor of highly paid employees.

In the 1940s, the fact that pension plans were exempt from wartime wage controls enabled employers to channel larger amounts of money into such plans. Court decisions holding that retirement benefits were mandatory subjects of collective bargaining likewise encouraged the growth of the private pension system by forcing many employers with a unionized workforce to establish such programs. And, as income tax rates rose and became more progressive the "tax deferred" shelter offered by a qualified retirement plan became more attractive to both employers and employees.

The booming economic times of the 1950s and 1960s fostered the growth of the defined benefit pension plan -- a plan which “promised” a fixed monthly payment for life. An employer could credit workers for "past service” and thus encourage the retirement of older, less productive workers. As pension funds grew, financial abuses followed. In 1958, Congress enacted the Welfare and Pension Disclosure Act desperate to “shed light” and stop such abuses. The legislation, patterned after the securities law, mandated full disclosure of the operations of any private pension plan. Companion legislation – the Labor-Management Reporting and Discipline Act – was passed by Congress in 1959. The legislative intent: full disclosure of private pension plans would help assure their financial integrity in much the same manner as the federal securities laws helped assure the integrity of the securities markets. But, unlike the decision to buy securities, the decision as to which private plan an employee should participate in was not the employee's decision.

The closing of the Studebaker automobile plant in South Bend, Indiana, is generally regarded as a pivotal event in the history of the movement toward comprehensive federal regulation of private pension plans. On December 9, 1963, Studebaker Corporation announced that it was closing its automotive manufacturing plant in South Bend, Indiana, and consolidating its remaining automating activity at its Hamilton, Ontario, plant. This announcement followed a long period in which the American plant had been losing money. As a result of the plant closing, some 5,000 workers were dismissed in addition to the 2,000 that had already been laid off. In the end, 1,800 workers eventually lost their jobs. The dismissed workers were members of the United Automobile Workers and were covered under a single-employer defined benefit pension plan negotiated between the United Auto Workers (UAW) and Studebaker.

When the plant closed, the UAW and Studebaker entered into an agreement settling the terms for terminating the plan. The termination did not produce litigation; it implemented default priorities contained in the plan and divided the participants into three groups: 3,600 retirees and active workers who had already reached the permitted age of 60; approximately 4,000 employees, aged 40 to 59, who had at least ten years of service with Studebaker and whose pension benefits had therefore vested; and a residual group of 2,900 workers who had no vested rights.

Persons in the first group had the first claim on the pension assets; they received full lifetime annuities. The cost of the annuities purchased for this group was about $21.5 million. After the annuities, only $2.5 million remained in the pension fund, less than the amount necessary to cover the benefits of the members of the second group who received approximately 15% of the personal value of their earned pension benefits. The third group received "zip."

The original Studebaker plan was effective in November 1950. It granted prior service credits, creating an immediate unfunded liability of $18 million that was supposed to be funded over a thirty-year period. Benefits were increased in 1953, 1955, 1959, and 1961. Each time additional unfunded liabilities for past service credits were created. Each increase was to be amortized over a new thirty year period. These unfunded past service liabilities could not be funded with the pension assets.

Studebaker was the oldest major auto producer in the United States. Several years before the shutdown, Studebaker had celebrated its 100th anniversary. Thousands of workers were laid off from their jobs a few days before Christmas. The number of persons affected by the termination attracted attention, since the plan covered almost 11,000 Studebaker employees. The average age and length-of-service of the workers who received only a small percentage of their expected pension benefits made them a very appealing group of victims. The 4,000 or so workers in the age 40 - 59 group who got only fifteen cents for every expected dollar of vested pension benefits, had an average age of 52 and an average period of service with the employer just under 23 years.