Shawn has a masters of public administration, JD, and a BA in political science.
ERISA Definition and Purpose
Michelle is about to retire after 40 years of dutiful service to her employer. She is looking forward to a satisfying retirement. Her financial planner assures her that her savings and pension from her employment will be more than adequate to afford her the lifestyle she wants to live for the rest of her life.
However, a few months after her retirement, she receives a notice that her employer's pension plan is insolvent due to her employer's mismanagement and misappropriation of funds earmarked for her and her fellow pensioners. She will not be paid. Her finances are devastated, and she must return to work to keep up her standard of living or retire in poverty.
The Employee Retirement Income Security Act of 1974, commonly called ERISA, was enacted to prevent this nightmare. ERISA is a federal law that regulates most private-sector employee benefit plans. You can break employee benefit plans into two general categories. Retirement plans are a type of employee benefit where an employee defers income until retirement, such as with a traditional pension. Welfare plans, on the other hand, are plans that provide health benefits, disability benefits, vacation benefits and similar types of benefits. You should note that ERISA does not require an employer to establish a plan but does set minimum standards if an employer voluntarily does so.
ERISA also established the Pension Benefit Guaranty Corporation. This federally chartered corporation guarantees payment of certain types of ERISA-covered benefits if the benefit plan terminates.
Covered Retirement Plans
ERISA protects employees, like Michelle, as long as their retirement plan is covered under ERISA. Covered retirement plans can be divided into two categories: defined benefit plans and defined contribution plans. A defined benefit plan is the traditional pension. An employer promises to pay a set amount of monthly retirement benefits based upon such things as salary history and length of employment.
A defined contribution plan, on the other hand, is a retirement plan where an employee defers some of her pay into a plan, which invests the money. An employer may or may not contribute to the plan, and the employee bears the risk of investment loss. Examples of defined contribution plans include 401(k)s, 403(b)s, profit-sharing plans, simplified employee pension plans and employee stock ownership plans, among others.
One of the most important requirements of ERISA is the imposition of fiduciary duties upon those who administer covered plans. A fiduciary duty is a very high standard of care imposed by law where the fiduciary has a duty to place the interests of another ahead of the fiduciary's own interest.
In other words, a plan administrator must manage covered plans only in the best interest of employees, like Michelle. This is the case even if an action may not be in the best interest of the employer.
ERISA mandates minimum standards for covered plans that are created and managed by employers for the benefit of their employees:
- Employers are required to provide plan information to employees who participate in a plan, including information about the plan's features and how it is funded. Every plan must have a written plan document that outlines how it is run and its requirements. Plans will also have a booklet called the Summary Plan Description (SPD) that is supposed to be easy to read and understand. Employees, like Michelle, will also receive benefit statements. The frequency of the benefit statements depends on the type of plan.
- A plan is also subject to minimum standards for participation, vesting and benefit accrual. In other words, as explained by the U.S. Department of Labor, 'The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits and to have a non-forfeitable right to those benefits.'
For example, Michelle may have to work six months before being eligible for participation in the company's retirement plan. Her employer may not contribute to the plan (often by matching her contribution up to a certain percentage) for even a longer period of time. She may have to work for the company for a set period of time before the plan gives her the legal right to the money contributed by the employer to the plan on her behalf, which is called 'being vested'. If Michelle leaves the company before her employer's contributions are vested, she will lose the right to that money. Of course, she has the right to take the money she contributed to the plan.
- ERISA also has rules relating to funding that ensure plans are funded adequately so payment obligations to retirees are met. The idea is to make sure that Michelle's retirement benefits will be there when she retires.
Keep in mind that the requirements set by ERISA and its regulations will vary depending upon the type of plan.
The Department of Labor's Employee Benefits Security Administration (EBSA) is responsible for enforcing ERISA. Employees are also given the right to sue employers in court. According to the Department of Labor, employees can sue under ERISA if benefits have been denied, to determine rights of future benefits, for a breach of the plan's fiduciary's duties or to stop the plan from violating ERISA, among other reasons.
Let's review what we've learned. The Employee Retirement Income Security Act of 1974 was enacted to protect the assets that fund private sector employee benefit plans. ERISA also established the Pension Benefit Guaranty Corporation.
ERISA imposes fiduciary duties upon plan administrators that places the interests of the employee participants above all other interests. The Act also requires other minimum plan standards for relating plan information available to participants and for participation, benefit accrual and funding. The Department of Labor's Employee Benefits Security Administration enforces ERISA. Individual plan participants also have a right to bring a lawsuit in certain situations.
If you successfully complete this lesson, you could do the following:
- Define ERISA, SPD and EBSA
- Discuss ERISA's enactment for the purpose of safeguarding employee retirement funds
- Remember the benefits of the Pension Benefit Guaranty Corporation
- List two categories of employee benefit plans
- Outline conditions under which employees can sue under ERISA
- Indicate things that ERISA requires of employers who set up retirement plans
To unlock this lesson you must be a Study.com Member.
Create your account
Register to view this lesson
Unlock Your Education
See for yourself why 30 million people use Study.com
Become a Study.com member and start learning now.Become a Member
Already a member? Log InBack