Evan Miller is a partner with Hogan & Hartson L.L.P. who counsels companies that are associated with benefit plans in a variety of capacities. Miller has advised companies on ERISA’s reporting and disclosure requirements, its fiduciary and prohibited transaction rules, including plan assets issues. Miller is a member of the Bars of the District of Columbia and New York, and both the Tax Section and the Labor and Employment Law Section of the American Bar Association (ABA). He currently serves as co-chair of the Employee Benefits Committee of the Labor and Employment Section of the ABA and as a senior editor of “Employee Benefits Law.”

Evan Miller on ERISA and Retirement Savings

By Jada A. Graves

Evan Miller is a partner with Hogan & Hartson L.L.P. He represents clients concerning pension and welfare benefit plan issues under ERISA. He also counsels companies that are associated with benefit plans in a variety of capacities. Miller has advised companies on ERISA's reporting and disclosure requirements, and its fiduciary and prohibited transaction rules, including plan assets issues. In 2002, the Journal of Pension Planning & Compliance ran an article where Miller highlighted the diversification benefits of REITs for pension plans. Now, four years later, Portfolio caught up with Miller to get an overview of ERISA, the transformation of retirement savings plans and how REITs can benefit a retirement portfolio.

Portfolio: A substantial part of your practice involves counseling companies on employee benefits and ERISA. What is ERISA, why was it deemed necessary and how does it regulate defined benefit and defined contribution plans?

Miller: ERISA is a federal law that regulates the structure and operation of pension plans provided by private sector employers and their employees. It came about for several reasons. First, prior to ERISA, there was no overarching federal law regulating pension plans. Pension plans were largely regulated by state law. One important purpose of ERISA was to eliminate conflicting state regulation of pension plans and create a uniform law to regulate private sector pensions. Second was the need for a comprehensive scheme to ensure that persons who had access to pension plan assets as well as those who managed them, handled them responsibly and that companies that made promises to employees about their future pensions would take appropriate steps to fund those pensions and satisfy that promise.

One of the motivations for ERISA was the loss of pensions at the former Studebaker Corporation. When Studebaker went bankrupt in the 1960s, it turned out that its pension plan was grossly underfunded. As a result, few Studebaker employees and retirees received the pensions that had been promised to them.

A driving purpose of ERISA was to require people and entities that manage pension assets to act prudently to ensure that pension plan promises were met. ERISA also requires employers to put sufficient amounts of money into their pension plans to help ensure the pension promise would be satisfied.

Those objectives relate to defined benefit pension (DB) plans. But defined contribution (DC) plan participants also benefit from ERISA, because among other things, the statute also applies its prudent fiduciary management rules to DC plan arrangements. It also requires detailed reporting and disclosure to plan participants about the nature and operation of such plans.

Portfolio: What are some reasons companies are moving away from DB plans and adopting DC plans?

Miller: Each form of a pension plan has its pros and cons, but the primary reason that defined benefit plans are becoming extinct is due to the confluence of legal and accounting rules that have made them enormously expensive to provide to employees. DB plans are more expensive and financially riskier for corporate America than DC plans, and therefore companies do not offer them unless they have to for a crucial reason, and offer DC plans instead.

Portfolio: What are the advantages of a DB plan?

Miller: From an employee's perspective, the primary advantage of a DB plan is the certainty of a fixed, annualized pension income throughout their retirement. There is the further advantage that in the event of the termination of an underfunded DB plan, the employee's or retiree's pension will be guaranteed—up to a certain level—through pension insurance provided by a governmental agency known as the Pension Benefit Guaranty Corporation (PBGC).

From the pension plan sponsors' perspective, companies with a need to retain employees for the long term are well served by DB plans. Participants in these plans earn greater pensions with longer service, and thus DB plans provide an incentive for employees to remain with the company through most of their working lives. For companies in sectors where annual salaries tend to be relatively low, DB plans also serve as an attractive way for these companies to compete for high quality personnel despite paying lower annual salaries.

Portfolio: How well informed is the average employer and employee about their company's pension plan?

Miller: Under ERISA, employers are required to provide significant information to employees about their pension plans. However, the problem is that pension plan operation is a complex area and often the employees who receive the disclosures do not understand what they read. Also, a significant percentage of employees do not bother taking the time to read and review the pension disclosure materials provided to them. However, I think that many employers do not provide sufficiently detailed and user-friendly investment education programs to their employees.

From the plan sponsor's perspective, most employers are well informed about the structure and operation of their pension plans as a consequence of both legal and accounting requirements. I also believe that small companies often lag be-hind larger employers in their sophistication on pension administration and investment matters.

Portfolio: How does REITs' inclusion in pension plans enhance ERISA's fiduciary compliance?

Miller: ERISA requires the persons who construct a DB plan or DC plan portfolio to take prudent care when fulfilling their obligations. In particular, ERISA requires that such persons use the same level of care, skill and prudence that a person familiar with investment matters would use in making investments. In interpreting and applying the prudent person rule, an increasing number of courts are recognizing that in the pension investment context, the prudent person rule should be applied consistent with modern portfolio theory.

Portfolio: What other portfolio diversifiers are there besides REITs?

Miller: High yield bond funds and developing market funds have been used as portfolio diversifiers. Market neutral hedge funds were also used at one time to achieve portfolio diversifications, but they are now sufficiently ubiquitous in DB plans and are being used for objectives beyond portfolio diversification.