The Employee Retirement Income Security Act, commonly known as ERISA, is a 1974 federal law that sets minimum standards for most voluntarily established pension and health plans in private industry. The primary aim of ERISA is to provide protection for individuals participating in these plans.
Historical Context
Enacted on September 2, 1974, ERISA was introduced to address public concern about the mismanagement and abuse of private pension plan funds. Before ERISA, there were limited federal requirements for pension plans, leading to substantial variability in protection for workers’ retirement income.
Key Provisions
Pension Eligibility Rules
ERISA eased pension eligibility rules to ensure that more workers could participate in employer-sponsored pension plans.
Pension Benefit Guaranty Corporation (PBGC)
The act led to the creation of the Pension Benefit Guaranty Corporation, a federal agency tasked with protecting the retirement incomes of American workers in private-sector defined benefit pension plans. The PBGC steps in to take over the plans in the event of a default.
Management and Fiduciary Responsibilities
ERISA established rigorous guidelines for the management of pension funds. It set standards of conduct for plan managers (fiduciaries) and required them to act prudently and in the best interest of plan participants.
Types of Plans Covered
ERISA covers two types of retirement plans:
- Defined Benefit Plans: Plans that promise a specified monthly benefit at retirement, often based on salary and years of service.
- Defined Contribution Plans: Plans where employee or employer contributions are made to an individual account, with retirement benefits based on the account’s value at retirement.
Compliance and Enforcements
ERISA charges the Department of Labor with enforcing its provisions. Employers must provide detailed plan information to participants and follow specific reporting requirements. Additionally, ERISA preempts many state laws regarding employee benefit plans, giving it a broad scope of authority.
Examples and Application
An example of ERISA in practice is the oversight of a company’s 401(k) plan. ERISA requires that this plan:
- Provide participants with plan information, including important details about plan features and funding.
- Establish a grievance and appeals process for participants to receive benefits.
- Give participants the right to sue for benefits and breaches of fiduciary duty.
Related Terms
- Fiduciary: An individual who manages another person’s assets and has a legal obligation to act in that person’s best interest.
- Participant: An employee or former employee who is or may become eligible to receive a benefit from an employee benefit plan.
- Beneficiary: A person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit.
FAQs
What types of plans are excluded from ERISA?
Can an employee sue their employer under ERISA?
How does ERISA benefit employees?
Summary
The Employee Retirement Income Security Act (ERISA) of 1974 was a landmark law designed to regulate the management of private pension and benefit plans. By establishing the Pension Benefit Guaranty Corporation and setting standards for fiduciary responsibilities, ERISA has provided crucial protections for employees’ retirement savings.
