The world of retirement benefits is complex and multifaceted, especially when it comes to pensions. Sometimes, you might feel like you need an accounting degree to understand them. One law worth understanding plays a significant role in regulating pensions: the Employee Retirement Income Security Act or ERISA. Let’s break down how ERISA, which was enacted in 1974, affects employees’ retirement benefits today.
What is ERISA?
ERISA, which stands for the Employee Retirement Income Security Act, is a federal law that was enacted in 1974. Its primary purpose is to protect the retirement benefits of workers who participate in private-sector pension and welfare benefit plans. The law excluded “plans established or maintained by governmental entities, churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws.”
Key Provisions of ERISA
The main goal of ERISA was to protect employee retirement benefits. Until Congress passed ERISA, pensions or defined benefit plans were popular for corporations to offer their employees. In the simplest terms, defined benefit retirement plans mean employees could expect a set amount upon retiring. Employees typically didn’t contribute to these types of plans, so all of employees’ retirement savings were in the hands of their employer. However, their employers, including large corporations, tended to be risky with employees' retirement benefits and to underfund their plans. So Congress passed ERISA which included the following provisions to protect employees’ retirement accounts:
- Fiduciary Responsibilities: ERISA imposes strict fiduciary responsibilities on those who manage and oversee pension plans: the employers. Fiduciaries must act prudently, solely in the interest of plan participants, and diversify plan investments to minimize the risk of significant losses.
- Reporting and Disclosure: ERISA requires pension plans to provide participants with essential information about the plan, its funding, and its management. This includes regular updates on plan status, investment options, and fees.
- Vesting and Funding Standards: ERISA sets minimum vesting standards to ensure that employees have a non-forfeitable right to their accrued benefits after a certain period of service. It also establishes minimum funding requirements for pension plans to ensure they can meet their obligations.
- PBGC Insurance: The Pension Benefit Guaranty Corporation (PBGC) was established under ERISA to protect the pensions of private-sector workers in case their employer-sponsored pension plans become insolvent.
ERISA and Public Pensions
These provisions caused many employers, except government entities, to move away from pensions as a retirement benefit. Government entities were excluded from ERISA’s requirements yet remain among the worst actors for securing employee retirement benefits. On average, the 50 states have set aside only $ cents to fund every dollar of pension benefits.
Governments were excluded from ERISA’s protections because they follow different accounting standards than corporations. However, some public pension plans follow ERISA-like practices voluntarily, providing participants with more transparent information and improving governance.
Just as corporate employees were counting on their retirement benefits to secure their future when ERISA was passed in 1974, today’s public employees are counting on their pensions. Yet government entities have not been truthful or transparent with their employees or the public about the status of their pension plans.
Employees deserve to know the truth about their retirement plans, which is our mission at Truth in Accounting. We strive to provide accurate and transparent government financial information.
Truth in Accounting does not provide financial advice. If you are concerned about your retirement savings, please consult with legal and financial experts who specialize in retirement benefits and can help you make informed decisions.