If private sector employers choose to offer retirement plans to their employees, those plans must follow standards established by the federal Employee Retirement Income Security Act, better known as ERISA.
ERISA guidelines require that workplace retirement plans meet certain minimum standards regarding plan information and the protection of plan assets. The Act also grants certain rights to workers who save for retirement on the job through qualified retirement plans.
What Is the Employee Retirement Income Security Act (ERISA)?
The Employee Retirement Income Security Act or ERISA is a federal law that establishes minimum standards for most retirement and health plans voluntarily established by private companies. Essentially, ERISA is a law that protects retirement assets as well as plan participants and their beneficiaries.
Signed into law in 1974 by President Gerald Ford, ERISA has had several amendments in the decades since to expand its protections and provisions. There are three entities responsible for administering and enforcing ERISA requirements on private employers:
• Employee Benefits Security Administration
• Internal Revenue Service
• Pension Benefit Guaranty Corporation
The Employee Benefits Security Administration is a division of the U.S. Department of Labor, while the Internal Revenue Service falls under the umbrella of the Treasury Department.
ERISA, Explained
ERISA doesn’t require employers to offer retirement plans to employees but it does require employers who do to meet certain standards. Specifically, under ERISA guidelines employers must:
• Provide plan participants with information about the plan, including its features and how it’s funded
• Follow a fiduciary standard in administering the plan and plan assets on behalf of participants
• Establish a grievance and appeals process for participants to get benefits from their plans
• Allow employees to sue for benefits or in the case of a breach of fiduciary duty
So, for example, if you’re enrolled in a retirement plan at work your employer must provide you with documents outlining the different 401(k) fees you’ll pay. They must also give you written notice of upcoming plan changes before they take place. If you think your plan administrator is abusing plan assets in violation of their fiduciary duty, you could sue for damages.
Types of ERISA Plans
Qualified retirement plans covered by ERISA include defined benefit plans and defined contribution plans. Defined benefit plans, often referred to as pension plans, offer a set retirement benefit to workers. Defined contribution plans pay out a retirement benefit determined by an employee’s elective salary deferrals and/or retirement contributions made by the employer. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.
ERISA also covers certain health benefits. For example, the Consolidated Omnibus Budget Reconciliation Act (COBRA) is an amendment to ERISA that allows employees the right to continue their employer’s health care coverage for a set period of time after leaving employment under circumstances. Flexible Spending Accounts (FSAs) also fall under ERISA guidelines, though Health Spending Accounts (HSAs) typically do not.
History of ERISA
Congress developed ERISA guidelines in response to public concerns over the mismanagement and abuse of private pension plans. The 1950s and 1960s saw these plans increase in popularity, prompting the Kennedy administration to establish the Committee on Corporate Pension Funds in 1962.
A report published by the Committee estimated that by the end of 1964, private pension funds had accumulated $75 billion in assets. This, along with the increased use of private pension plans among unions, led the Committee to suggest a need for greater federal oversight and regulation.
A documentary released in 1972 brought several instances of pension plan abuse to light, leading Congress to pass ERISA in 1974. Subsequently, Congress also passed the following amendments to the law:
• The Retirement Equity Act of 1984
• The Consolidated Omnibus Reconciliation Act of 1985
• The Federal Employees’ Retirement System Act in 1986
• The Health Insurance Portability and Accountability Act in 1996
• The Patient Protection and Affordable Care Act in 2010
These amendments, along with others aimed at women and children, have expanded ERISA requirements and protections to millions of workers in the United States and their families.
ERISA Guidelines & Requirements
Employers who offer qualified retirement plans covered by ERISA must administer them in accordance with ERISA guidelines. Some of the key points include:
• Making information about the plan readily available to plan participants, including investment options, fees and any scheduled changes to the plan terms
• Establishing minimum standards for participation in an eligible plan
• Determining vesting requirements and establishing a vesting schedule for employees who contribute and/or receive employer matching contributions
• Ensuring plan administrators adhere to a fiduciary standard when managing plan assets on behalf of employees
• Guaranteeing payment of benefits after a plan termination
• Establishing a process through which employees can file grievances or lawsuits against the plan to get benefits or make a claim for breach of fiduciary duty
In other words, ERISA exists to protect the money you save in your workplace retirement plan from any form of abuse and to make sure you understand your plan and have access to the benefits in the plan.
Who Is ERISA Eligible?
ERISA extends to qualified plans and employees who participate in them. Specifically, this includes employees of private companies such as:
• Corporations (both C- and S-corp companies)
• Limited liability companies
• Partnerships
• Non-profit organizations
ERISA does not extend to employees of religious organizations or churches, nor does it cover companies that operate outside of the United States. The Thrift Savings Plan (TSP), which is a retirement plan that’s open to federal employees and U.S. military personnel, is not covered by ERISA either.
What Does ERISA Cover?
There are several types of retirement plans that can fall under ERISA guidelines. ERISA retirement plan protections are extended to:
• 401(k) plans (including traditional 401(k), safe harbor 401(k) and SIMPLE 401(k) plans)
• 403(b) plans
• SIMPLE IRA plans
• SEP IRA plans
• Employee stock ownership plans (ESOP)
• Profit-sharing plans
• Defined benefit plans (i.e. pensions)
Unlike 401(k)s, traditional or Roth IRAs are not subject to ERISA, since they’re typically administered by individuals rather than corporations.
Recommended: What’s the Difference Between a 401(k) and an IRA?
Employer Fiduciary Under ERISA
One of the most important provisions of ERISA centers on fiduciary responsibility. The fiduciary duty standard requires that those who act as fiduciaries do so in a way that promotes the best interests of the individuals whose assets they’re managing.
What this means, in simple terms, is that plan administrators can’t do anything they like with the assets in a qualified plan. Instead, they have to manage those assets in a way that promotes the best interests of the plan participants. This includes things like:
• Acting prudently when making investment decisions
• Monitoring investment options
• Diversifying plan assets in order to manage risk
• Following the terms of the plan in accordance with ERISA standards
• Avoiding conflicts of interests
For example, a plan administrator can’t use plan assets to make an investment that would benefit them personally, nor could they recommend an asset to the plan in which they have a business or personal interest. Such actions could constitute a breach of fiduciary duty and they could be grounds for a lawsuit brought by the plan participants.
ERISA does not mandate a specific rate of return within a 401(k), but it does ensure that administrators act in the best interest of participants.
What Are ERISA Violations?
ERISA violations are actions that violate the standards and guidelines established by the Act. The Department of Labor specifies which actions constitute civil ERISA violations and which ones are criminal in nature.
Civil violations of ERISA include:
• Failing to operate the plan according to the fiduciary standard
• Using plan assets for personal gain
• Improperly valuing plan assets or failing to hold plan assets in trust
• Not following the terms of the plan
• Not performing due diligence in selecting and monitoring service providers
• Taking adverse action against an employee who exercises their rights under the plan
• Failing to comply with ERISA Part 7 and the Affordable Care Act in the case of welfare benefit plans, such as FSAs
Meanwhile, criminal ERISA violations include:
• Embezzling money from the plan
• Offering kickbacks
• Making false statements
• Concealing facts or documents
• Coercion
Punishments for civil and criminal ERISA violations range from fines to jail time, with repeat violations punished more harshly.
The Takeaway
Contributing to a retirement plan at work could help you to achieve your long-term financial goals. ERISA lays out guidelines that your company must meet if they choose to offer such a plan.
If you don’t have a retirement plan at work, you do still have options for saving. You can open an Individual Retirement Account (IRA) or invest through a taxable brokerage account. Take the next steps toward securing your retirement by opening an account on the SoFi Invest® investment app.
FAQ
What is the main purpose of the ERISA?
The main purpose of ERISA is to protect employees who save in qualified retirement plans at work. Congress passed ERISA after private pension plan abuses left many workers shortchanged in terms of their retirement savings.
What does ERISA compliance mean?
ERISA compliance means an employer offers one or more qualified plans in accordance with ERISA guidelines. Employers who violate ERISA rules can face penalties, including fines and possibly jail time for severe or repeat violations.
Who can sue under ERISA?
Employees who participate in a qualified retirement plan or health plan covered by ERISA can sue if they believe their company has unfairly denied them access to their benefits or that a breach of fiduciary duty has occurred.
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