ERISA: The law that forever altered retirement planning

Labor Day 1974 came during a tumultous time in American politics, arriving just a few weeks after President Richard Nixon resigned amid the Watergate scandal. But lawmakers at the time were able to put aside their political differences and enact a far-reaching piece of federal legislation that has broadly popularized retirement plans, changing many things for the better.
This was the Employee Retirement Income Security Act of 1974, which added bankruptcy-related protections for private-sector pension programs and eventually led to the creation of workplace 401(k) accounts.
This groundbreaking law, signed on Sept. 2, 1974, is perhaps the key piece of federal legislation that protects assets in retirement plans. The legislation initially focused on safeguarding employee assets in private-sector retirement plans and established the federal Pension Benefit Guaranty Corp., said David John, a senior policy adviser at the AARP Public Policy Institute.
The PBGC helps to protect retirement plans when employers go bankrupt.
“Workers no longer have to worry about losing the pensions they earned after a lifetime of hard work if their plan terminates,” said Julie A. Su, acting secretary of labor, in a statement commemorating the agency’s 50th anniversary. 
The law also sets minimum standards and rules for other types of retirement programs. These include eligibility rules, how long you must work before you receive a nonforfeitable interest in your retirement benefits and spousal rights in the event of an employee’s death.
ERISA doesn’t require employers to set up a retirement plan, however.
The ERISA legislation requires retirement plans to provide information regarding employee participation, vesting, the accrual of benefits and funding by sponsors. The law also imposes accountability on fiduciaries, the people who exercise authority or control over a plan’s management or investments. Vesting refers to the time when the financial interests in a retirement account are conveyed or transferred to an employee.
Fiduciaries who don’t act appropriately could be held accountable for making up financial losses in a retirement plan, and participants might be able to sue for breaches of fiduciary duty. This fiduciary responsibility can include making sure the investment options in a 401(k) plan are diversified and reasonably low in cost, John said.
Defined benefit plans are one important category covered by ERISA. These plans, funded by employers, promise to pay recipients a specific monthly dollar amount in retirement, usually under a formula that incorporates factors such as an employee’s salary, age and the number of years worked at the company.
A second category, defined-contribution plans, usually are funded mainly by contributions made by workers, though employers might offer matching funds. Employees thus are responsible for deciding how to invest their money in defined-contribution plans, which include 401(k) retirement accounts. While many traditional defined-benefit pensions got their start before the adoption of ERISA in 1974, 401(k) plans began to emerge after the legislation was enacted.
ERISA authorized IRAs but doesn’t cover them, as there is no employer involvement. IRAs also debuted in the mid-1970s but subsequent legislation expanded eligibility and allowed much higher contributions, which have increased over the years.
IRAs were designed for people not covered by retirement plans at work, but they also play a complementary role by allowing workplace assets to be rolled over when a person changes jobs or retires, noted the Investment Company Institute, the mutual fund trade association. That is, rollover IRAs are a popular way for workers to transfer money out of a 401(k) plan when ending their employment.
It certainly has helped. While the advent of Social Security and other programs is clearly important, the rise of traditional pension programs along with 401(k) and similar plans also have been impactful.
Americans have amassed around $40 trillion in retirement plans, with IRAs accounting for $14.3 trillion of that and 401(k)-type plans $11.1 trillion, according to the Investment Company Institute. Defined-benefit plans, or traditional pensions, accounted for most of the rest. These numbers exclude Social Security balances.
However, ERISA rules generally don’t apply to plans set up or maintained by government entities and a few other categories. And it’s worth noting that many Americans, including more than half of Black and Latino workers, don’t have any workplace retirement coverage, John said.
Yes. “ERISA’s most enduring impact may be that it began an era of continued enhancements to employee protections and contributed to the reduction of discriminatory treatment of U.S. workers,” noted accounting specialists BDO USA in a commentary. ERISA also covers many health-related benefits offered by employers.
The initial legislation “was not as comprehensive as has often been assumed and required subsequent legislation to address its missing or incomplete components,” BDO added. “Despite these initial shortcomings, ERISA laid the groundwork for the modern era of employee retirement security and employee protections in the United States.”
John agrees. “Typically, when a retirement bill comes before Congress, some part of it will refer to ERISA,” he said.
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