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Employee Retirement Income Security Act of 1974 (ERISA)

ERISA is the controlling body of law governing retirement plans, and preempts (“trumps”) any state law addressing them. The original goal of ERISA was to reform defined benefit plans by ensuring diversification of invested funds. It prohibited the investment of any more than ten percent of a pension fund’s assets in company stock (ESOPs and other profit-sharing plans such as 401(k) plans are exempted.) Some of the many protections that ERISA affords are:

  • Employers can no longer decide who is qualified to belong to a pension program. Under ERISA, any worker aged 21 or older who has worked for at least one year qualifies for participation.
  • Employers can no longer withhold “vesting” rights (the percentage of benefit an employee is entitled to receive after a specified period of employment) until retirement. ERISA established three vesting schedules that employers must follow.
  • Prior to ERISA, there were no rules regarding proper funding for pensions; thus, underfunded programs became every retiree’s nightmare. ERISA now formulates funding of pension programs to ensure that fund assets cover accrued liabilities. Under complex rules, it permits companies to amortize funding deficiencies over several years.
  • Under ERISA, widows and widowers are generally protected by survivor’s rights to pensions. These protections are afforded through “joint and survivor annuity” provisions, which must be affirmatively elected by the plan participant.
  • ERISA creates fiduciary duties (duties of trust and confidence, requiring that the person act primarily for the benefit of another and not for himself/herself) on the part of plan administrators, who must act in the interest of plan beneficiaries.
  • ERISA requires that investment funds be diversified to minimize risk to plan participants.
  • ERISA imposes severe penalties for underfunding of pension plans.

Inside Employee Retirement Income Security Act of 1974 (ERISA)