ERISA, or the Employee Retirement Income Security Act, is a piece of legislation that was passed in 1974 in the interest of protecting the assets of qualified retirement plans in the U.S. from misuse by plan administrators. It primarily governs pensions and other retirement planning accounts that are employer-sponsored in the private sector.
The Act requires that certain information and disclosures be made available to plan beneficiaries, it requires a certain level of conduct by plan fiduciaries, and it provides access to the courts in the event of actions that require remedy.
History of ERISA
ERISA was passed in 1974, but its beginnings go back over a decade earlier. In 1961, U.S. President John F. Kennedy established the President’s Committee on Corporate Pension Plans in order to evaluate the needs of plan beneficiaries and ensure that their assets were being adequately protected.
In 1963, the Studebaker Corporation, a manufacturer of automobiles, closed its plant. It was discovered that its pension plan was so poorly managed that most plan participants received settlements worth only a fraction of their vested value. Nearly 3,000 workers received no money at all.
Throughout the rest of the 1960s, various investigations and hearings revealed that the mismanagement of private pensions was a widespread phenomenon, and many laws were proposed to hold fiduciaries of these plans to high standards of conduct.
This movement culminated when, on Labor Day 1974, President Gerald R. Ford signed into law the Employee Retirement Income Security Act.
Those responsible for carrying out the plan’s objectives are subject by ERISA to strict accountability standards. This includes anyone who exercises discretionary authority over a plan’s assets or management, including those who give investment advice to the plan.
Under ERISA, fiduciaries may be held personally responsible for restoring losses to the plan that are caused by the misuse of assets.
Not only does ERISA establish standards for plan administrators, but it provides certain protections and benefits to plan participants, too. Under ERISA, plan participants may sue plan fiduciaries for breach of duty.
ERISA also provides protection in the event that a plan is terminated. If this happens, participants may receive back an amount equal to their contributions from the federally chartered corporation known as the Pension Benefit Guaranty Corporation.
Plans Not Governed by ERISA
While many pensions and other employer-sponsored accounts for retirement planning are covered by ERISA, some are not.
Plans established by churches and governments are excluded from ERISA requirements.
The administrative costs required for ERISA compliance make retirement plans prohibitive for smaller employers. To allow these employers to offer plans to their employees without having to navigate the confusing requirements of ERISA, there are options available that are excluded from the Act’s jurisdiction.
A Simplified Employee Pensions (SEP) is one such example. It works much like a traditional IRA but is established by the employer, allowing the employer to make contributions if they so desire.