The regulatory framework governing retirement plans was built at a time when most workers relied on defined benefit pensions. Investment decisions were centralized; participants bore little direct market risk. Today, that world has been replaced almost entirely by defined contribution plans, where individuals shoulder both investment and longevity risk.
Following our discussion of investor‑protection architecture, this post examines how ERISA’s fiduciary model fits, sometimes uncomfortably, with a system in which participants choose from increasingly complex menus and defaults shoulder enormous responsibility on their behalf.
Chapter 3:
ERISA in a DC World: When Participants Became Their Own CIOs
The Retirement Regime
ERISA and the Fiduciary Overlay
The Employee Retirement Income Security Act of 1974 (ERISA) applied a different set of tools to retirement assets held in employer plans.
At its core, ERISA provides:
- Minimum standards for participation, vesting, funding (for defined benefit plans), and reporting.
- Fiduciary duties imposed on those who manage plan assets or have discretionary authority over plan administration:
- Exclusive benefit and loyalty: act solely in the interests of participants and beneficiaries.
- Prudence: act with the care, skill, prudence, and diligence of a knowledgeable expert.
- Diversification: avoid unnecessary concentration of risk.
- Adherence to plan documents consistent with ERISA.
- Enforcement and remedies through the Department of Labor (DOL) oversight and a private right of action for participants.
Where the securities laws primarily regulate issuers and intermediaries, ERISA regulates the stewards of other people’s money, such as plan sponsors, investment committees, trustees, and investment managers. In practice, this means a retirement plan can hold a wide range of vehicles (mutual funds, CITs, separate accounts, private funds), but those who choose and monitor them must meet a high fiduciary standard in doing so.
The Shift from Defined Benefit to Defined Contribution
In 1974, when ERISA was enacted, the retirement landscape was dominated by defined benefit (DB) plans. Over the subsequent decades, the U.S. has experienced a profound shift toward DC plans, such as 401(k), 403(b), and 457(b).
- Among private-sector workers with access to an employer plan, only about 15% had access to a DB plan in 2021, versus 65% with access to a DC plan; some had access to both[1].
- Survey of Consumer Finances data show the share of workers covered by DB plans falling from roughly 59% in 1989 to 21% in 2022, while DC coverage rose from 55% to 83%.[2]
- As of early 2025, roughly half of private-sector workers saving for retirement are doing so through 401(k) plans, with access and participation boosted by auto-enrollment and new mandates.[3]
This shift fundamentally changed who bears risk and who makes investment decisions. In DB plans, sponsors and their advisers made asset allocation decisions, and participants bore relatively little market risk. In DC plans, participants bear investment and longevity risk directly, often through participant-directed accounts where they select from a menu of options or default into target-date or balanced funds.
ERISA’s fiduciary standards were crafted initially with DB plans in mind, with minimal adjustments made to reflect the reality of the defined contribution role. Today, these are applied to a world in which participants are effectively their own CIOs, even if they default into QDIAs, and the investment menu is populated by a growing mix of vehicles, some squarely inside the “Regulatory Perimeter” and an increasingly large number outside of it.
That mismatch between participant sophistication and product complexity is the backdrop for the deregulation questions we’ll explore later.
The Cost of Protection
None of these protections are free. The public markets and retirement regimes impose direct and indirect costs on issuers, pooled vehicles, and intermediaries, which in turn manifest as fees, operational overhead, and, at times, a lower willingness to use the most heavily regulated structures.
Examples of cost layers:
- Public company reporting. Preparing and auditing financial statements; producing 10-Ks, 10-Qs, 8-Ks, and proxy materials; implementing internal controls; and responding to SEC comments all require significant legal, accounting, and internal staff resources. Studies and policy analyses routinely cite increased disclosure and governance requirements as a key driver of the decline in the number of public companies, and the SEC’s own estimates for implementing new disclosure rules run into the billions of dollars.[4]
- ’40 Act fund compliance. Registered funds must maintain compliance programs, designate a chief compliance officer reporting to the board, and implement detailed policies for trading, valuation, liquidity, derivatives, custody, and advertising. Prospectus updates, shareholder reports, board meetings, and regulatory filings add recurring legal, printing, and distribution costs.
- ERISA governance and litigation risk. Plan sponsors and fiduciaries bear ongoing costs for committee governance, expert advice, benchmarking, vendor oversight, and preparing participant disclosures. The risk of fiduciary litigation has increased, prompting many sponsors to devote more resources to process, documentation, and insurance.
From a policy standpoint, these are features, not bugs: robust protections require real work and real money. But for manufacturers and intermediaries facing fee compression, this also creates a strong incentive to stay private rather than go public; to prefer vehicles and structures with lighter or different regulatory obligations; and to innovate in ways that preserve economics while skirting the heaviest retail-oriented rules.
That incentive structure is a key driver of the “functional deregulation” dynamic we see today in the retirement marketplace: the search for lower regulatory overhead and higher margins by moving participant assets away from the most heavily regulated regimes, even as ERISA fiduciary expectations tighten.
As participants became central decision‑makers, product selection began to matter more than ever. At the same time, economic pressure pushed providers toward different vehicles and structures. In the next post, we’ll examine the clearest early example of this shift: the rise of collective investment trusts (CITs) in place of traditional mutual funds.
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[1] A Visual Depiction of the Shift from Defined Benefit (DB) to Defined Contribution (DC) Pension Plans in the Private Sector. Congress.gov, December 27, 2021
[2] Pension or 401(k)? Retirement Plan Trends in the U.S. Workplace. Michael T. Owyang, Julie Bennett, Brooke Hatthorn. Federal Reserve Bank of St. Louis, March 20, 2025
[3] The 401(k) Has Reached a Tipping Point in Its Takeover of American Retirement. Anne Tergesen. Wall Street Journal, February 5, 2025
[4] Regulatory costs of being public: Evidence from bunching estimation. Michael, Ewens, Kairong Xiao, Ting Xu, Journal of Financial Economics, March 2024
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