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How ERISA Impacts Your Retirement | Retirement

Key Takeaways

  • The Employee Retirement Income Security Act, or ERISA, is a federal law enacted in 1974 that protects retirement assets by requiring clear plan details, fiduciary responsibility and participant rights.
  • Employers and plan administrators must provide specific information to plan participants and act in the best interest of employees.
  • ERISA plans may offer more protection from creditors than IRAs, but some exceptions apply.

The Employee Retirement Income Security Act safeguards the financial future of many Americans saving for retirement. ERISA was signed into law by President Gerald Ford on Sept. 2, 1974 and today oversees approximately 2.8 million health plans, 765,000 private pension plans and 619,000 other welfare benefit plans, according to the U.S. Department of Labor. Those plans cover about 153 million American workers and their beneficiaries.

In April, the Department of Labor finalized its Retirement Security Rule to protect workers who are saving and investing. It involved updating the definition of an investment advice fiduciary under ERISA and the IRS. The final rule requires trusted investment advice providers to give prudent, loyal, honest advice that is free from overcharges. In addition, financial institutions overseeing investment advice providers must have policies and procedures in place to manage conflicts of interest and ensure providers follow the guidelines.

Here’s what to know about ERISA and your retirement savings:

  • What is ERISA?
  • How does ERISA work?
  • What does ERISA mean for your retirement benefits?
  • Who is not covered by ERISA?

What Is ERISA?

ERISA is a federal law that establishes minimum standards for many retirement and health benefit plans provided by private sector employers. According to the ERISA rules:

  • Retirement plans must provide participants with information about the plan’s features and funding.
  • ERISA sets minimum standards for participation in the plan, vesting, the accrual of benefits and funding.  
  • ERISA specifies fiduciary responsibilities for the people who manage and control plan assets. 
  • Retirement and health care plans must establish an appeal process and give participants the right to sue for benefits and breaches of fiduciary duty. 
  • If a defined benefit plan is terminated, payment of certain benefits are guaranteed through the Pension Benefit Guaranty Corporation.

“The ERISA is a crucial piece of legislation for anyone involved in managing or participating in employee benefit plans, particularly retirement planning,” said John Pace, a certified public accountant and partner at Pace & Associates, CPAs, in Austin, Texas, in an email. “A fiduciary under ERISA must act in the best interest of plan participants, a standard further underscored by the update to the definition of an investment advice fiduciary.”

Professionals making recommendations that could influence investment decisions, expecting compensation, will need to adhere to the updated guidelines. “Ensuring compliance with this definition involves meticulous record-keeping and transparent communication,” Pace said. “Most recently, when handling estate and trust tax returns, we constantly emphasized how ERISA could impact investments and the distribution of assets in fiduciary settings. This awareness is vital not only for compliance but also for optimizing the strategic tax planning opportunities that benefit all beneficiaries in the long term.”

How Does ERISA Work?

The ERISA rules cover most private sector employer-sponsored retirement benefits, including 401(k)s and pensions, and some health care plans. “It’s making sure that all the features and specifics of a plan are clearly spelled out and detailed,” said Beau Henderson, founder of RichLife Advisors in Gainesville, Georgia, in an email. “ERISA-covered plans require accountability from a fiduciary who is running the plan.”

Employers and plan administrators must provide specific information to plan participants and act in the best interest of employees. “You are not required to offer a retirement plan as an employer, but if you choose to offer a retirement plan, there are going to be laws that govern how you offer, implement and maintain that plan,” said Jennifer Belmont Jennings, an attorney with MGD Law in St. Louis, in an email. “They want to make sure that the employee, the person who is contributing money to these plans, is protected and that the employer is acting in the best interest of the employee.”

ERISA is administered and enforced by the U.S. Labor Department’s Employee Benefits Security Administration, the Internal Revenue Service and the Pension Benefit Guaranty Corporation. “Basically, the federal government put this in place to help protect retirement assets, so there’s not as much risk of people losing these assets,” Henderson said.

What Does ERISA Mean for Your Retirement Benefits?

The law requires that plan administrators provide employees with standardized information about the plan. “For example, with a 401(k), you must have specific information about all the types of investments that are in there, the cost of the investments and the performance of the investments,” Jennings said. “You’re going to have accountability in that plan and employees are given the right to sue for breaches of a fiduciary duty.”

Plan administrators are required to act in the best interest of plan participants, not their own interests. “It’s really showing that you are doing your due diligence and you’re acting in the best interest and following a duty of care as you are developing a retirement plan, implementing this plan and maintaining it for your employees,” Jennings said. “If you are going with somebody who is not the least expensive, you must document why and the selection process.”

ERISA retirement plans may offer more protection from creditors than other types of retirement accounts in the event of bankruptcy. In general, creditors are not able to access money in 401(k)s that are covered under ERISA. “However, there are some exceptions to this rule,” Henderson said. “If you have an ERISA-qualified retirement account, some or all of your money may be claimed as a part of a court order relating to divorce, child support or other civil judgments. The federal government can also seize your qualified retirement account to pay criminal penalties and delinquent federal taxes.”

Who Is Not Covered by ERISA?

ERISA generally does not cover plans established or maintained by local, state or federal governments or churches. The law applies to some 401(k) plans, but not all. If you move your retirement savings from a 401(k) to an IRA, you may lose some of your ERISA protections. “If, as an advisor, I were to recommend that you move your $500,000 401(k) to an IRA, which happens all the time, I could potentially be putting you in a position where you’re more vulnerable to more risks, such as that asset being subjected to creditors,” Henderson said. Employees in non-ERISA retirement plans should take extra care when selecting investments and carefully consider the costs of the plan.

Sarah Goldberg
Sarah Goldberg

Sarah is a seasoned financial market expert with a decade of experience. She's known for her analytical skills, attention to detail, and ability to communicate complex financial concepts. She holds a Bachelor's degree in Finance, is a licensed financial advisor, and enjoys reading and traveling in her free time.

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