Definition
The Employee Retirement Income Security Act (ERISA) is a U.S. federal law enacted in 1974 that sets minimum standards for pension plans in private industries. It is designed to protect the retirement assets of Americans by implementing rules that qualified plans must follow to ensure plan fiduciaries do not misuse plan assets. Additionally, ERISA provides for individual retirement accounts, establishes extensive reporting and disclosure requirements, and assures the availability of plan information to participants.
Phonetic
The phonetic transcription for “Employee Retirement Income Security Act (ERISA)” would be: ɪmˈplɔɪiː rɪˈtaɪəmənt ˈɪnkʌm sɪˈkjʊrɪti ækt (ɪˈrɪsə).
Key Takeaways
- Protects Retirement Assets: The Employee Retirement Income Security Act (ERISA) is a federal law designed to protect the retirement assets of employees. This includes those who have defined benefit plans and defined contribution plans. Under ERISA, employers have a duty to meet certain standards to ensure the funds are managed properly and not misused.
- Minimum Standards Provided: ERISA provides minimum standards for pension plans in private industry to safeguard the financial stability of such plans. These standards include participation and funding rules to ensure an adequate buildup of funds, benefit accrual, vesting rules to promote job tenure, and accountability rules making trustees liable for breach of fiduciary obligations.
- Mandates Detailed Reporting: ERISA requires plans to provide participants with information about plan features and funding. This includes details such as the specifics of the plan, funding and financing, eligibility, benefits, and your rights under the plan. Furthermore, it mandates detailed reporting to the government and requires accountability for any fiduciary negligence or misconduct.
Importance
The Employee Retirement Income Security Act (ERISA) is a highly significant piece of legislation in the field of business and finance because it standardizes the protection for individuals in most voluntarily established private-sector pension plans. Enacted in 1974, ERISA sets comprehensive instructions for pension and health plans to ensure they are managed reliably and responsibly, and that those responsible for managing these plans (fiduciaries) uphold the highest standards in their duties. Moreover, it assures that employees receive the pension and health benefits that were promised to them, even if a company faces bankruptcy. ERISA also established the Pension Benefit Guaranty Corporation (PBGC), an entity that ensures certain benefits are available even when a pension plan is terminated. Thus, ERISA plays a significant role in safeguarding the retirement assets and earnings of millions of American workers.
Explanation
The Employee Retirement Income Security Act (ERISA) was enacted with the primary purpose to protect individuals participating in employer-established retirement and health plans. Prior to ERISA, participant’s rights were not adequately protected, often resulting in losses of expected, and sometimes much-needed, retirement benefits. ERISA set forth mandatory standards for plan disclosure, reporting, and fiduciary responsibilities, meant to ensure that participants are well-informed and treated fairly by their pension plan.ERISA is used to provide participants with detailed information about their retirement or health benefit plan, including plan rules, financial details, and documents on the operation and management of the plan. The act places responsibility on the fiduciaries — the individuals who control a plans’ operation or the management of its assets — to act in the best interests of the participants and beneficiaries. It also gives participants the right to sue for benefits and breaches of fiduciary duty. These legal protections ensure that the plan funds are safe and that participants receive the benefits they expect upon retirement.
Examples
1. IBM Retirement Plan: IBM, a giant multinational technology company, offers its employees a systematized retirement plan that falls under ERISA. The company faced a lawsuit filed by its employees claiming that IBM violated ERISA regulations by not disclosing essential information about the retirement plan which caused significant losses to the plan participants. In this case, ERISA played a crucial role in protecting employees’ rights and reassuring proper execution of retirement plans.
2. The DuPont Savings Plan: E.I. du Pont de Nemours and Company, a leading science and technology conglomerate, provides its workers with a savings and investment plan (SIP) regulated by ERISA. DuPont was accused of breaching ERISA regulations due to the mismanagement of the retirement fund which led to a drop in the company’s stock value. ERISA was instrumental in this case to provide legal relief and protect the retirement funds of the employees.
3. University of Pennsylvania’s Retirement Plan: University of Pennsylvania, a renowned educational institution, has a retirement plan for its faculty and employees that is governed by ERISA. The University faced a lawsuit filed by present and former employees alleging that the institution violated ERISA regulations through mismanagement of the funds and excessive fee charges. The role of ERISA here was to provide legal grounds for the employees to claim their alleged losses and ensure that the University’s retirement plan practices are fair and efficient.
Frequently Asked Questions(FAQ)
What is the Employee Retirement Income Security Act (ERISA)?
The Employee Retirement Income Security Act (ERISA) is a U.S federal law enacted in 1974 that sets minimum standards for most voluntarily established retirement and health plans in the private industry to provide protection for individuals in these plans.
Who does ERISA protect?
ERISA protects the retirement assets of Americans by implementing rules that require advisors and administrators of retirement plans to act in the best interests of the participants (employees).
How does ERISA enforce its standards?
ERISA enforces its standards through imposing fiduciary responsibilities on plan trustees, disclosure obligations and remedies for employees in the event of a breach of duty by the plan’s trustee.
Does ERISA cover all retirement plans?
No, ERISA does not cover all retirement plans. Plans established or maintained by government entities or churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws are exempted from ERISA.
How does ERISA benefit employees?
ERISA ensures that employees receive the retirement and health benefits that were promised by their employers. It also provides employees with a recourse if they do not receive the appropriate benefits.
What are the reporting and disclosure requirements under ERISA?
ERISA requires retirement plan providers to give participants information about plan features and funding. They are also required to provide timely notices and documents including a copy of the plan’s latest annual report, summary plan description, and a statement of the individual’s benefits.
Can an ERISA-covered plan be terminated?
Yes, employers can choose to terminate ERISA-covered plans but must follow the specific process outlined by the Department of Labor. This includes ensuring all vested benefits are 100% funded at the time of termination.
How is ERISA enforced?
ERISA is enforced through three agencies–the Internal Revenue Service (IRS), the Department of Labor, and the Pension Benefit Guaranty Corporation. These bodies are responsible for investigating violations, enforcing provisions and correcting violations accordingly.
What is a fiduciary under ERISA?
Under ERISA, a fiduciary is anyone who exercises control or discretion over management of the plan or its assets, renders investment advice for a fee, or has discretionary authority in administering the plan. Fiduciaries are held to a high standard of conduct and have specific responsibilities under the act.
Related Finance Terms
- Plan Fiduciary
- Vesting Period
- Defined Benefit Plan
- Defined Contribution Plan
- Summary Plan Description (SPD)
