What is the 'Employee Retirement Income Security Act - ERISA'
The Employee Retirement Income Security Act of 1974 (ERISA) protects the retirement assets of Americans by implementing rules that qualified plans must follow to ensure plan fiduciaries do not misuse plan assets. Under ERISA, plans must provide participants with information about plan features and funding, and furnish information regularly and free of charge.
BREAKING DOWN 'Employee Retirement Income Security Act - ERISA'ERISA also sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits and to have a nonforfeitable right to those benefits. It also establishes detailed funding rules that require plan sponsors to provide adequate funding for the plan.
ERISA and Accountability
ERISA requires accountability of plan fiduciaries, and generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan. ERISA also addresses fiduciary provisions and bans the misuse of assets through these provisions.
ERISA and Participant Protection
In addition to insisting participants are informed, ERISA also gives participants the right to sue for benefits and breaches of fiduciary duty. To ensure participants do not lose their retirement contributions if a defined plan is terminated, ERISA guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation.
Retirement Plans Not Governed by ERISA
Not every retirement plan is subject to the terms of ERISA. In particular, ERISA does not cover retirement plans set up and maintained by government entities and churches. Similarly, if a company sets up a plan outside of the United States for its nonresident alien employees, ERISA does not govern that plan.
The complicated rules of ERISA deter some small business owners from setting up retirement accounts for their employees. To allow these companies to sidestep the confusing regulations, there are alternatives. For example, a Simplified Employee Pension (SEP) plan is basically an individual retirement account (IRA) set up by an employer so it can contribute to its employees' retirement savings efforts; SEPs are often not subject to ERISA regulations.
History of ERISA
This set of laws was enacted to address irregularities in the administration of certain large pension plans. In particular, the Teamsters Pension Fund, which had a rather colorful history involving questionable loans to Las Vegas casinos, brought the issue of fiduciary malfeasance related to retirement accounts to the public eye. ERISA was partially created in response to those issues.