This week our nation reached a milestone, as it was on Labor Day in 1974 that President Gerald Ford signed into law the Employee Retirement Income Security Act (ERISA). Not many people know what ERISA stands for, and few can explain its significance. Still, millions of Americans have benefited in the forty years since ERISA first set safeguards for pension plans and first sanctioned the creation of individual retirement accounts and 401(k)-style workplace plans.
In the years leading up to ERISA, the concept of “insuring” employee benefits accounts gained momentum, due to events like the 1963 closing of a Studebaker-Packard plant in South Bend, Indiana. Because the company had an underfunded pension plan, 4,000 employees received lump sum payments valued roughly at only 15% of the actuarial value of their pension benefits. These individuals—ages 40-59, and with ten years at the plant—did better than the remaining 2,900 workers, who received no pensions at all.
Numerous events like this spurred the enactment of ERISA. To protect the interests of employee benefits plan participants and their beneficiaries, the Act:
- Requires the disclosure of financial and other plan information to beneficiaries.
- Establishes standards of conduct for plan fiduciaries.
- Provides for appropriate remedies and access to the federal courts.
While ERISA safeguards traditional pensions, 401(k)-style and other defined contribution programs started to gain in popularity in the early 1980s. Today, more workers are covered by defined contribution plans than by traditional pensions. Many see 401(k) plans as better suited for our mobile labor force, because workers switching jobs can transfer these “portable” funds to IRAs.
ERISA has expanded to also regulate health-insurance benefits for employers who offer these programs. Besides requiring the provision of specific plan features and funding information, the law mandates strict deadlines for disclosing plan information to eligible employees.
Unfortunately, most employers do not realize just how ERISA empowers their employees. For example, employees and their beneficiaries can initiate civil and criminal actions in federal court to enforce the requirements of ERISA or to enforce the terms of a benefits plan. Failure to comply with ERISA can be costly to employers. Daily and cumulative penalties are possible. Any business that offers one or more employee welfare benefits plan must comply with ERISA.
Of course my advice to employers, as always, is that they retain a qualified, trusted, and vigilant third-party administrator to handle these burdens for them. The right vendor will manage all necessary communications, forms, and record keeping. As with so many federal programs and mandates, a teaspoon of prevention is far better than a tablespoon of medicine.