Introduction
As we celebrate the 50th anniversary of the Employee Retirement Income Security Act of 1974 (ERISA), it is important to reflect on the impact this legislation has had on private sector employee benefit plans such as traditional pension plans, 401(k) plans, 403(B) plans, employee stock ownership plans, profit sharing plans and health and welfare benefit plans. Governmental and church plans generally are not subject to ERISA.
It is important to remember that ERISA does not require employers to provide retirement or welfare benefit plans or require a certain level of benefits, but it does regulate the operation of those plans once they are established. ERISA requires employers to provide participants with adequate information about plan provisions, sets minimum standards for vesting and funding, establishes fiduciary duties designed to ensure that employers administer their benefit plans in the best interest of their employees and requires employee benefit plans to meet certain standards to obtain favorable tax status.
ERISA created uniformity across the country in the area of employee benefits law. ERISA preempts all state and local laws that relate to any employee benefit plan other than state insurance, banking and securities laws. ERISA preemption is particularly important for employers with employees in multiple states.
Although ERISA was originally enacted to address concerns about the security of employees' retirement benefit plans, it has advanced to become the cornerstone of private sector retirement and welfare plans. Over the last 50 years, ERISA has evolved alongside the economy and workforce, and this anniversary provides an opportunity to examine both its accomplishments and its future.
Birth of ERISA: Protecting Employee Benefits in an Uncertain Era
ERISA emerged during a period of financial instability, driven by concerns over the vulnerability of employee retirement benefits. High-profile pension failures, including the collapse of the automaker, Studebaker Corporation, which left thousands of employees without promised retirement benefits, highlighted the need for reform. Before ERISA, private pension plans were largely unregulated, and many employees had little protection if companies mismanaged funds or ceased operations.
Initially, ERISA focused on defined benefit (DB) plans, commonly known as pension plans, which were the primary form of retirement savings at the time. Pension plans guarantee employees a set payout upon retirement, generally calculated based on their years of service and salary. ERISA introduced vesting rules to protect employee benefits after a certain period of service and set funding requirements to ensure companies financed these plans properly. It also created the Pension Benefit Guaranty Corporation to guarantee pension payments if the plan sponsor became insolvent.
As the costs of maintaining a DB plan increased, the prominence of defined contribution (DC) plans, especially 401(k) plans, grew. When first introduced following the addition of section 401(k) to the tax code in 1978, most employers viewed 401(k) plans as an addition to their defined benefit plans. But, over time, the number of defined benefit plans declined. DC plans now dominate the retirement landscape. According to the U.S. Bureau of Labor Statistics, by 2022, only 3% of private industry workers had access to only a DB plan, 12% had access to both plans and 56% had access to only a DC plan. During this transformation, however, ERISA expanded to regulate these new DC plans, solidifying its role in the oversight of retirement benefits.
ERISA Today: Navigating the Shift to Employee-driven Retirement and Health Care
Today, ERISA remains the cornerstone of retirement plan protections. The transition from traditional pensions to DC plans has shifted the burden of retirement savings onto employees. To address this shift, ERISA has been amended throughout the years to enhance DC plans, including the addition of safe-harbor 401(k) plans, SIMPLE plans, automatic enrollment into 401(k) plans and catch-up contributions to 401(k) plans, to name just a few.
As originally enacted, ERISA’s regulation of group health and welfare plans was limited. ERISA has since been expanded by important health care legislation, including: rules allowing for continuation of health coverage for a limited time on the occurrence of certain events, such as a termination of employment or a change in employment status from full-time to part-time; special enrollment rights for eligible family members following certain events, such as birth of a child or marriage; limitations on exclusions from coverage because of pre-existing conditions; coverage of preventative services; parity between medical/surgical benefits and mental health benefits; and minimum hospital stays for mothers following the birth of a child.
The Road Ahead: Expanding ERISA’s Reach in a Changing Workforce
As ERISA looks ahead to its next 50 years, several key challenges will shape its future. As ERISA has evolved, complying with ERISA and its regulations has become increasingly difficult for employers. This complexity can be a barrier to wider retirement plan adoption by some employers, particularly small businesses. This has left a significant portion of the workforce without access to employer-sponsored retirement plans. Further, many employees lack a clear path to saving for retirement. Even those who are covered may not be saving enough to maintain a comfortable lifestyle in retirement. This retirement savings gap is a significant issue for employers, employees and policymakers alike.
Since its inception, ERISA has shown resilience in adapting to changing economic and workforce conditions. However, its future success will depend on how effectively it evolves to tackle these new challenges, ensuring that all employees have access to meaningful retirement and health benefits.
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For more information and assistance with ERISA related matters, please feel free to contact Lisa Zimmer or De’Andre Robbins.
