The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to protect the rights of employees under retirement plans offered by their employers.

In addition to safeguarding retirement funds from employer mismanagement, ERISA requirements also cover the following:

  • Fiduciary responsibility - the plan's trustee must manage plan assets and make decisions in the best interests of the plan participants. The trustee cannot sell assets to the plan or earn commissions from plan investments. Also, plan assets must be kept separate from company assets. Regarding investment options under ERISA:

    • Fiduciaries for the plan must follow the Prudent Investor standard discussed in the Handling Client Funds section.

    • Sufficient investment options must be available under the plan so that plan participants can create an adequately diversified portfolio.

    • An investment policy statement is recommended to serve as a guideline for investment decisions to be made. The statement may include comments on risk tolerance, investment philosophy, time horizons, asset classes and expectations regarding rates of return.

      Look Out!
      It is essential for an IA to understand investment policy statements. Either the plan participants or the plan trustees may sue an IA who does not follow the guidelines of this statement. The IA could be liable for breach of fiduciary duty, even if the plan assets have outperformed the market.
  • Nondiscrimination - all plan participants must be treated equally under the plan, and highly compensated employees must not benefit to a greater degree than non-highly compensated employees.

  • Vesting - plan benefits may require a vesting period before the employee earns the right to the benefit if he/she leaves the company. ERISA regulations limit the length of such a vesting period to a reasonable schedule.
Not all employer plans are subject to ERISA. For example, governmental retirement plans are exempt from ERISA requirements. IRAs are not subject to ERISA, since an IRA is not considered an employer plan. Also, nonqualified plans, which do not qualify for tax-deductible contributions, are not subject to ERISA.
Nonqualified Retirement Plans

Related Articles
  1. Financial Advisor

    Are You ERISA Compliant? Follow This Checklist

    Following a checklist can make achieving compliance with Employee Retirement Income Security Act of 1974 (ERISA) requirements much less burdensome.
  2. Retirement

    403(b)s Among Plans Not Covered by New Fiduciary Rule

    Some retirement plans, including 403(b)s, are not covered by the DOL's new fiduciary rule. Here's what it means.
  3. Financial Advisor

    How Do Pension Funds Work?

    Traditional private pension funds are well regulated by the government through ERISA and the PBGC. Alternative investments are aiding portfolio returns.
  4. Retirement

    Six Options for Moving Retirement Money - Part I

    If you leave your current job and have a 401(k), there are many things you can do with it.
  5. Retirement

    What You Should Know About the New Fiduciary Rule

    These key questions and answers clarify the DOL's new fiduciary rule and how it impacts individual investors saving for retirement.
  6. Financial Advisor

    How to Follow Investment Committee Best Practices

    More plan sponsors are forming investment committees to fortify their fiduciary standards. These are best practices for investment committees to follow.
  7. Retirement

    The 401(k) and Other Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  8. Financial Advisor

    4 Compensation Plans for Wealthy Earners

    Here's what advisors need to know about non-qualified deferred compensation plans.
  9. Financial Advisor

    Bankruptcy Protection For Your Accounts

    Will the plan assets you've worked hard for be safe if you experience a personal financial crisis?
Frequently Asked Questions
  1. Why Do a Reverse Merger Instead of an IPO?

    Reverse mergers are often the most cost-efficient way for private companies to trade publicly.
  2. Determining a Firm's Percentage of Credit Sales

    Find out where to look for information about determining a company's percentage of credit sales.
  3. What Does the Diluted Share Price Reveal?

    Learn how diluted share price affects earnings and the company's overall financial performance.
  4. How Can Institutional Holdings Be More Than 100%?

    No entity can own more than 100% of a company's outstanding shares, but it can be reported that way.
Trading Center