The Employee Retirement Income Security Act is a federal law enacted in 1974 that protects the retirement assets of American workers. The law mandates rules that pensions, 401(k)s and employee health care plans are required to follow to ensure that plan administrators act in the best interests of plan participants.
ERISA was signed into law by President Gerald Ford on Sept. 2, 1974, and today covers 684,000 retirement plans, 2.4 million health plans and an additional 2.4 million welfare benefit plans, according to the U.S. Department of Labor. Those plans cover about 141 million American workers and their beneficiaries.
What Is ERISA?
ERISA is a federal law that establishes minimum standards for many retirement and health benefit plans provided by private sector employers.
- Require that retirement plans provide participants with information about the plan’s features and funding.
- Set minimum standards for participation in the plan, vesting, the accrual of benefits and funding.
- Specify fiduciary responsibilities for the people who manage and control plan assets.
- Require that retirement and health care plans establish an appeal process and give participants the right to sue for benefits and breaches of fiduciary duty.
- If a defined benefit plan is terminated, payment of certain benefits are guaranteed through the Pension Benefit Guaranty Corporation.
How Does ERISA Work?
The ERISA rules cover most private sector employer sponsored retirement benefits, including 401(k)s and pensions, and some health care plans. “It’s making sure that all the features and specifics of a plan are clearly spelled out and detailed,” says Beau Henderson, founder of RichLife Advisors in Gainesville, Georgia. “ERISA covered plans require accountability from a fiduciary who is running the plan.”
Employers and plan administrators must provide specific information to plan participants and act in the best interest of employees. “You are not required to offer a retirement plan as an employer, but if you choose to offer a retirement plan, there are going to be laws that govern how you offer, implement and maintain that plan,” says Jennifer Belmont Jennings, a senior wealth advisor with Hightower Wealth Advisors in St. Louis. “They want to make sure that the employee, the person who is contributing money to these plans, is protected, and that the employer is acting in the best interest of the client.”
ERISA is administered and enforced by the U.S. Labor Department’s Employee Benefits Security Administration, the Internal Revenue Service and the Pension Benefit Guaranty Corporation. “Basically, the federal government put this in place to help protect retirement assets so there’s not as much risk of people losing these assets,” Henderson says.
What ERISA Means for Your Retirement Benefits
The law requires that plan administrators provide employees with standardized information about the plan. “For example, with a 401(k), you must have specific information about all the types of investments that are in there, the cost of the investments, the performance of the investments,” Jennings says. “You’re going to have accountability in that plan, and employees are given the right to sue for breaches of a fiduciary duty.”
Plan administrators are required to act in the best interest of plan participants, not their own interests. “It’s really showing that you are doing your due diligence and you’re acting in the best interest and following a duty of care as you are developing a retirement plan, implementing this plan and maintaining it for your employees,” Jennings says. “If you are going with somebody who is not the least expensive, you must document why and the selection process.”
ERISA retirement plans may offer more protection from creditors than other types of retirement accounts in the event of bankruptcy. “Federally, assets in the ERISA plans are protected from creditors,” Henderson says. “Creditors cannot come after money in these 401(k)s that are covered under ERISA.”
Who Is Not Covered by ERISA?
ERISA generally does not cover plans established or maintained by local, state or federal governments or churches. The law applies to some 401(k) plans, but not all. If you move your retirement savings from a 401(k) to an IRA you may lose some of your ERISA protections. “If as an advisor I was to recommend you move your $500,000 401(k) to an IRA, which happens all the time, I could potentially be putting you in a position to where you’re more vulnerable to more risks such as that asset being subjected to creditors,” Henderson says. Employees in non-ERISA retirement plans should take extra care when selecting investments and carefully consider the costs of the plan.