Employee Retirement Income Security Act (ERISA)

Definition

The Employee Retirement Income Security Act (ERISA) is a federal law enacted in 1974 that sets standards for the management of employee benefit plans, particularly retirement plans. It was designed to protect the interests of employee benefit plan participants and their beneficiaries by establishing rules for reporting, disclosure, and fiduciary responsibilities of plan managers. ERISA also addresses the funding of pension plans, ensuring that workers receive the retirement benefits they have earned.

5 Must Know Facts For Your Next Test

1. ERISA applies to most private-sector employee benefit plans but does not cover government plans or church-related plans.
2. The act requires plans to provide participants with information about plan features and funding, including summary plan descriptions and annual reports.
3. ERISA mandates that pension plans must have a minimum funding requirement to ensure that they can meet future obligations to retirees.
4. It includes provisions for the establishment of the Pension Benefit Guaranty Corporation (PBGC), which insures certain defined benefit plans against bankruptcy.
5. ERISA sets standards for fiduciaries who manage retirement plans, holding them accountable for their investment decisions and requiring them to act prudently.

Review Questions

• How does ERISA influence the management of employee benefit plans in terms of fiduciary responsibilities?
  • ERISA greatly influences the management of employee benefit plans by establishing clear fiduciary responsibilities for those who manage these plans. Fiduciaries are required to act in the best interest of plan participants and beneficiaries, ensuring that investments are made prudently and in accordance with the plan's objectives. This accountability is crucial because it protects employees’ retirement savings from mismanagement and conflicts of interest.
• What are the key reporting and disclosure requirements imposed by ERISA on pension plans?
  • Under ERISA, pension plans must adhere to specific reporting and disclosure requirements to promote transparency. Plans are required to provide participants with summary plan descriptions that outline their rights and benefits. Additionally, they must file annual reports with the Department of Labor detailing financial conditions, investments, and operations. This information ensures that employees are well-informed about their retirement benefits and the health of their plans.
• Evaluate how ERISA has impacted employee confidence in retirement security since its enactment.
  • Since its enactment in 1974, ERISA has significantly bolstered employee confidence in retirement security by instituting protections that safeguard retirement benefits. By enforcing standards for transparency, fiduciary duty, and minimum funding requirements, ERISA helps ensure that workers can trust their benefits will be there when they retire. Furthermore, the establishment of the Pension Benefit Guaranty Corporation provides an additional safety net for defined benefit plans, reinforcing employees' faith in their long-term financial security.

Related terms

Pension Plan: A pension plan is a type of retirement plan that provides a monthly income to employees after they retire, often based on salary and years of service.

Fiduciary Duty: Fiduciary duty refers to the obligation of individuals who manage a retirement plan to act in the best interest of the plan participants and beneficiaries.

401(k) Plan: A 401(k) plan is a defined contribution retirement savings plan that allows employees to save for retirement on a tax-deferred basis, often with employer matching contributions.