The Employee Retirement Income Security Act of 1974: An Outdated Regulatory Framework for Retirement Investors

• Author: Emma L. Russ
• Position: J.D. Candidate, The University of Iowa College of Law, 2020; B.A. Carleton College, 2016
• Pages: 399-429

399

The Employee Retirement Income

Security Act of 1974: An Outdated

Regulatory Framework for

Retirement Investors

Emma L. Russ*

ABSTRACT: Major changes in the retirement plan industry justify further

scrutiny of those who provide investment advice because retirement savers are

more reliant on them when making investment decisions. However,

investment professionals are held to different standards of care when offering

advice. Investment advisers adhere to a fiduciary standard, which requires

them to act in the best interests of their client when providing investment

advice. In contrast, broker-dealers are subject to the much lower standard of

suitability, which only requires broker-dealers to provide suitable investment

advice. Unfortunately, the suitability standard has allowed broker-dealers to

provide advice despite having conflicts of interest. Investors are harmed as a

result. The Employee Retirement Income Security Act of 1974 (“ERISA”) was

enacted to protect retirement plans, but much of the investment advice given

today falls out of ERISA’s scope. Both the U.S. Department of Labor and the

U.S. Securities and Exchange Commission have attempted reforms in order to

provide further protection, but have fallen short. Therefore, Congress must

amend ERISA to impose a fiduciary standard on broker-dealers to minimize

conflicted advice for ordinary people attempting to save and invest for

retirement.

I.INTRODUCTION ............................................................................. 401

II.BACKGROUND ............................................................................... 402

A.ORIGINS OF RETIREMENT ......................................................... 402

B.THE RISE OF PRIVATE PENSION PLANS IN THE UNITED

STATES ................................................................................... 403

C.ENACTMENT OF THE EMPLOYEE RETIREMENT INCOME

SECURITY ACT ......................................................................... 405

D.STATUTORY FRAMEWORK OF ERISA ......................................... 406

*

J.D. Candidate, The University of Iowa Colleg e of Law, 2020; B.A. Carleton College, 2016.

400 IOWA LAW REVIEW [Vol. 105:399

1.ERISA Covered Plans .................................................... 407

2.Plans Not Covered by ERISA ........................................ 408

3.Relevant Provisions of ERISA ....................................... 408

i.Fiduciary Standards Under Title I of ERISA ............... 409

ii.Prohibited Transactions Under Title I and Title II ...... 409

E.THE DEPARTMENT OF LABOR’S 1975 FIVE-PART TEST .............. 410

F.THE DEPARTMENT OF LABOR’S REFORM OF ERISA ................... 411

1.Registered Investment Advisers vs. Broker-Dealers .... 411

2.An Outdated Fiduciary Standard Under ERISA ......... 413

3.The Contentious Issue of Fiduciary Duty .................... 413

4.The Department of Labor’s New Fiduciary

Standard ......................................................................... 414

G.THE DEMISE OF THE DOL’S RULE AND THE SEC’S ATTEMPT

TO FILL THE VOID ................................................................... 415

III. RETIREMENT PLAN INDUSTRY CHANGES MAKE ERISA

INEFFECTIVE AT PROTECTING RETIREMENT INVESTORS AND

THE SEC’S PROPOSED SOLUTION FALLS SHORT ........................... 418

IV.CONGRESS SHOULD AMEND ERISA TO ENSURE THE SEC

ENFORCES A STRONGER STANDARD OF CARE ON BROKER-

DEALERS ........................................................................................ 421

A.CONGRESS SHOULD IMPOSE A FIDUCIARY STANDARD ON

BROKER-DEALERS WHO PROVIDE INVESTMENT ADVICE ON

RETIREMENT ACCOUNTS .......................................................... 422

1.Acting in the Client’s Best Interest .............................. 422

2.Heightened Disclosure Requirements ......................... 423

3.Comprehensive and Transparent Investment

Recommendations ........................................................ 424

4.Proposed Language of Amendment to ERISA ........... 424

B.CONGRESS SHOULD DELEGATE AUTHORITY TO ENFORCE THE

PROPOSED FIDUCIARY STANDARD TO THE U.S. SECURITIES AND

EXCHANGE COMMISSION ......................................................... 425

C.THE PROPOSED FIDUCIARY STANDARD IMPOSED BY CONGRESS

WOULD PROVIDE THE STRONGEST PROTECTION TO

RETIREMENT INVESTORS .......................................................... 426

V.CONCLUSION ................................................................................ 428