By 1960, pension plans were widespread, covering nearly half of U.S. workers.¹ But they weren’t subject to uniform funding, vesting, or participation standards, and they weren’t insured, so when a company went broke, its pension did too. When American auto manufacturer Studebaker went out of business in the mid-1960s, thousands of pensioners were faced with massive benefit cuts. This sparked outrage, and Congress responded with ERISA in 1974.²
What kinds of plans does ERISA cover?
At first, ERISA covered only pensions, but now it covers 401(k) plans and many other types of retirement-related plans. Today, there are approximately 710,000 ERISA-covered retirement plans providing benefits to about 154 million workers; there are also about five million health and welfare benefit funds subject to ERISA.³ In total, ERISA governs plans that hold roughly $11 trillion in assets.
Employers that sponsor ERISA-covered plans enjoy tax advantages, such as the ability to deduct contributions, and employees benefit from tax-deferred savings and growth.
Four broad categories of plans are covered by ERISA.
1 Corporate and other sector-defined contribution plans, such as:
- 401(k) plans
- Money purchase pension plans
- Profit-sharing plans
- Employee stock ownership plans
- Hospital and higher education 403(b) plans
2 Defined benefit pension plans, including:
- Traditional pension plans
- Cash balance pension plans
3 Taft-Hartley plans, such as:
- Pension plans
- Trustee-directed annuity plans
- 401(k) plans
4 Some health and welfare benefit plans
ERISA outlines standards for the people who have authority or control over plan assets, referred to as plan fiduciaries. Plan fiduciaries must act in the best interests of plan participants and beneficiaries and behave as a prudent expert would in some matters.
The U.S. Department of Labor (DOL) enforces the fiduciary provisions under ERISA and will bring actions against plan fiduciaries for violations such as:
- Failing to operate the plan prudently and for the exclusive benefit of participants
- Using plan assets to benefit certain parties related to the plan, including the plan administrator, the plan sponsor, and parties related to these individuals
- Failing to properly value plan assets at their current fair market value or to hold plan assets in trust
- Failing to follow the terms of the plan (unless inconsistent with ERISA)
- Failing to prudently select and monitor service providers
What ERISA means to employees and beneficiaries
ERISA protects participants in employer-sponsored retirement plans the following ways:
- Participants’ assets are held in trust and can’t be touched by the participants' or employers' creditors.
- Participants are required to receive certain plan information (e.g., a summary plan description or an annual notice) to help them make informed decisions.
- In a participant-directed plan, the participant must be provided a broad range of investment options with different risk/return characteristics from which to choose.
What ERISA means to plan sponsors and fiduciaries
Sponsors of an ERISA-covered plan (and any designated plan fiduciary) owe covered employees the duties of prudence and loyalty. This means that they have to make certain decisions as well-informed experts would and must put participating employees’ interests before their own. These duties are ongoing, and they usually require professional legal, investment, and administrative assistance. A plan sponsor or plan fiduciary who commits a fiduciary breach can incur personal liability or become the target of a lawsuit.
Additional regulatory protection
In addition to the DOL, retirement plans are protected by:
- the IRS, which is focused on ensuring that plans adhere to the compliance rules (e.g., coverage and nondiscrimination) that permit tax-favored (qualified) status; and
- the Pension Benefit Guarantee Corporation, which protects pension benefits by insuring private sector plans and guaranteeing monthly minimum benefits.
What is ERISA?—an important question
Employer-sponsored retirement plans are valuable tools—they help employers attract, retain, and reward employees while providing unique tax advantages and significant benefit protections to employees. ERISA makes this possible, but it comes with many responsibilities. Plan sponsors who can answer the question “What is ERISA?” and who understand these responsibilities will be better-informed and more effective fiduciaries.
1 “Evolution of employer-provided defined benefit pensions,” Monthly Labor Review, December 1991. 2 Pension Benefit Guaranty Corporation, November 2018. 3 “What We Do,” U.S. Department of Labor’s Employee Benefits Security Administration, https://www.dol.gov/agencies/ebsa/about-ebsa/about-us/what-we-do.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made here.
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