State Pensions Lack Federal Protections--Despite Anything They Might Say

State and local pensions often assure the public they are governed by federal ERISA or ERISA-like standards--which is not true. The public pays the price.

State and local government pensions are not subject to ERISA— the comprehensive federal law safeguarding corporate pensions. Worse still, no comparable state law protects the trillions in public plans.

In my book, Who Stole My Pension? I advise readers, “… to protect your retirement security you need to have some knowledge of the law that governs your pension—and the law’s strengths and weaknesses. While American pension laws are often regarded as the most comprehensive, … there are significant loopholes… and monitoring and enforcement by regulators is hardly foolproof.”

Most notable, the trillions in state and local government pensions are not subject to ERISA— the comprehensive federal law safeguarding corporate pensions. Worse still, there is no comparable state law protecting the assets in public plans.

Nevertheless, public pension officials routinely assure stakeholders that they are governed by, or voluntarily follow, federal ERISA, or ERISA-like standards—which is not true. The public pays the price for this deception. The truth is that state pension officials haven’t a clue about the intricacies of compliance with federal ERISA standards and shouldn’t be trusted to adhere to those standards.

The investigative findings in my 2021 forensic review of the State Teachers Retirement System (STRS) Ohio included commentary on the lack of comprehensive regulation of this $90 billion public pension.

Participants in Ohio's State Teachers Retirement System are not protected by the rules and regulations, or enforcement mechanisms that assure the efficacy of those protections, of the Employee Retirement Income Security Act of 1974, the regulatory guidance that has been issued under the legislation by the Departments of Labor and the Treasury, and the statutes' nearly half-century of case law progeny interpreting and enforcing the statutory and regulatory provisions.

Under Section 401(a) of the Internal Revenue Code, government plans, such as STRS Ohio, are expressly excluded from ERISA's protection. STRS Ohio admits that, "[a]s a governmental plan, STRS Ohio is not subject to the provisions of ERISA."

The High Cost Of Secrecy Preliminary Findings Of Forensic Investigation Strs Ohio 2021 (16)

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In my report entitled, "The High Cost of Secrecy," I observed that "ERISA's heightened fiduciary standards provide additional important protections to pensions generally lacking under state law.” My report went on to note that "STRS board compliance with ERISA standards can only improve management of the pension."

Why did I conclude that?

Because ERISA provides heightened fiduciary protections not otherwise generally available to a pension-plan's participants, and the enactment of ERISA itself evidences the deliberate decision to provide retirement protections greater than those available under general trust law.

To quote the United States Supreme Court:

[T]rust law does not tell the entire story. After all, ERISA's standards and procedural protections partly reflect a congressional determination that the common law of trusts did not offer completely satisfactory protection (emphasis added). And, even with respect to the trust-like fiduciary standards ERISA imposes, Congress expected that the courts will interpret this prudent man rule (and the other fiduciary standards) bearing in mind the special nature and purpose of employee benefit plans, as they develop a federal common law of rights and obligations under ERISA-regulated plans.

In my Report, I also correctly noted that the STRS Board was not required to comply with ERISA fiduciary standards.

In its August 19, 2021 Rebuttal of my findings, the pension did not– indeed, could not – deny that its Board was not required to comply with ERISA fiduciary standards. The pension-plan-participant protections provided by ERISA are simply not available to STRS participants, whether retired or still teaching.

Faced with the undeniable fact that its Board was not required to conform its conduct to fiduciary standards mandated by ERISA, in its Rebuttal STRS Ohio sought to minimize the immense significance of participants' lack of ERISA coverage, and to assuage its participants' legitimate concerns for the lack of such protections, with the statement that "[t]he [State Teachers Retirement] Board complies with the fiduciary standards stated in ORC 3307.15, which mirror the ERISA fiduciary standards, and the system maintains adequate fiduciary liability insurance."

While it is true that under the cited statute, "[t]he members of the STRS Board have a fiduciary duty to act as trustees of the funds deposited," State ex rel. Horvath v. State Teachers Retirement Bd., the Ohio Supreme Court's affirmance of that decision never once uses the word "fiduciary." Moreover, the statute says nothing about ERISA-imposed fiduciary obligations and duties and the statutory penalty provisions provide no penalties for anyone's violation.

In short, the sparse statutory and common-law plan-management performance requirements that the state of Ohio offers its STRS participants substantially pale when compared to those that ERISA provides. And these performance requirements under ERISA are given teeth by ERISA's enforcement provisions, which are markedly missing from Ohio's statutory schema.

As I concluded in my 2021 Report (and contrary to STRS Ohio’s claims), "ERISA's heightened fiduciary standards provide additional important protections to pensions generally lacking under state law" and "the STRS board is not similarly required to comply with ERISA fiduciary standards."

Anyone who tries to assure you that public pensions are comparably safeguarded, or that the lack of comprehensive federal (ERISA) safeguards for your state or local retirement plan is no cause for concern, either doesn’t know what they’re talking about, or is lying.