What is the Employee Retirement Income Security Act (ERISA)?

Since 1974, the Employee Retirement Income Security Act ERISA has protected the employees of companies that provide pension funds and health plans. It may seem hard to believe today, but in the 1960s, quite a few companies mismanaged employee pension funds and left retired employees with virtually nothing to live on.

Why ERISA Was Enacted

One high-profile case was the automobile company Studebaker, which went out of business in the 1960s and denied most employees all of the money they’d contributed to their retirement savings. Pension funds aren’t as common today, but prior to the 1980s, employees contributed to company pension plans instead of individual 401K funds. Unlike 401K plans, pension contributions are mandatory, and employees have no control over how their contributions are invested.

Before there were regulations governing how employee fiduciaries handled pension funds, companies that performed poorly, lost money and went out of business were able to prop themselves up by essentially stealing money from pension funds. When they finally went out of business, they simply didn’t pay retired employees the money they owed them. It was a serious problem in the mid-20th century, and President John Kennedy formed the Committee on Corporate Pension Plans to provide oversight for the dysfunctional pension system.

What ERISA Covers

In the 1970s, NBC News conducted an investigation into the system and produced a television special titled Pensions: The Broken Promise, which won the Peabody Award for journalism. It brought the problem to national attention and accelerated the passing of laws such as the Employee Retirement Income Security Act ERISA, which today contains all the U.S. laws regulating employee pension plans. Employers aren’t required to offer pension funds, but if they do, they’re required to handle them ethically and provide complete transparency to employees.

ERISA also regulates employee health plans to an extent. As with pensions, ERISA doesn’t require employers to offer healthcare, but if healthcare is offered, employers must handle the plans responsibly and make all relevant information freely available to employees. ERISA doesn’t apply to 401K plans because these funds aren’t handled by a fiduciary party. A fiduciary is simply a person or group that manages the money of another person or group. The party whose money is managed by the fiduciary is basically helpless and has to trust the fiduciary to do a good job.

What ERISA Doesn’t Cover

With a 401K, the fund is owned by the employee, and there is no requirement to contribute money or hand it over to a fiduciary. Employees can manage their own 401K investments, and they can even borrow against them and withdraw funds from them before retirement age. Most companies offer 401K plans, but many organizations still offer employee pensions.

Despite ERISA laws, pensions are still sometimes mismanaged, and organizations that lose the pension contributions of their employees have to make up the losses by raising prices or, in the case of mismanaged government pensions, raising taxes. Since ERISA was passed, additional pension reform policies have been enacted, including the Pension Protection Act of 2006, which penalizes organizations for contributing too little to employee pensions.

In an ideal world, pension funds provide retirement security and a tax-free investment vehicle for employees of a company. Legislation such as the Employee Retirement Income Security Act ERISA reinforces the promise corporations make to employees who give them money to invest.