ERISA Law: Explanation & Importance

Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

In the United States, ERISA Law helps protect workers' benefit plans that are funded by private employers. Discover more about the ERISA Law, including what plans are covered, plan standards, fiduciary duties, and how this law is enforced. Updated: 10/01/2021

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.

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  • 0:03 ERISA Definition and Purpose
  • 1:47 Covered Retirement Plans
  • 2:45 Fiduciary Duties
  • 3:20 Plan Standards
  • 5:29 Enforcement
  • 6:00 Lesson Summary
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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.

Fiduciary Duties

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.

Plan Standards

ERISA mandates minimum standards for covered plans that are created and managed by employers for the benefit of their employees:

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