Congress stepped in to require the vesting of pensions and a requirement that promised pension monies be held in trust for the workers’ benefit. In addition, Congress created the Pension Benefit Guaranty Corporation to provide insurance in the event of a pension plan’s failure. Congress also had the foresight in 1974 to broadly define retirement plans to incorporate what has become today’s most popular form of employer-sponsored retirement plan – the 401k plan (or 403b for non-profit organizations). Those plans did not even come into being until 978.
Different types of retirement plans
There are many kinds of retirement benefits. The following discussion explains the types and history of retirement benefits and whether they are subject to ERISA.
Defined benefit plans
Most retirement plans in existence in 1974 when the ERISA law was enacted were defined-benefit pension plans. Such plans guarantee a monthly lifetime annuity at a set sum determined based on years of employment and final average compensation over a worker’s employment history. Such plans place the risk of default on the employer to make good on any shortfall; and the establishment and administration of such plans require the use of an actuary to calculate the amount of money that must be placed in trust to meet the anticipated payout of benefits for each worker’s lifetime.
Congress added a provision known as the Retirement Equity Act to make sure that spouses received protection – the law mandates any retirement arrangement that provides payment of benefits in a form other than a husband and wife joint and survivor annuity requires spousal consent before the payout can occur. The ERISA law also mandates the issuance of Qualified Domestic Relations Orders (QDRO) to recognize a spouse’s interest in a pension and provide for the division of pension assets in the event of a divorce.
Defined contribution plans: 401K or 403b
Due to the high cost of maintaining defined-benefit plans and the onus placed on employers to fund the benefits, most companies have terminated their traditional pension plans (defined-benefits plans) and replaced them with what are known as defined-contribution plans that are popularly referred to as 401k or 403b plans. Under such arrangements, employees are promised that a certain percentage of their salary will be placed in the plan, and there is often an arrangement where an employer matches the employee’s contributions up to a certain level. The employee is given control over how their retirement funds are invested, but unlike defined-benefit plans, the risk of losses in the plan account are borne by the employee. In other words, if the employee invests imprudently causing the investments to lose value, the employee’s retirement plan value declines and the employer has no obligation to make up the losses.
Retirement plan fiduciary duty under ERISA law
For most employees, the funding, administration, and notification requirements relating to their plans is governed by the ERISA law. Thus, if the employer fails to make promised contributions or neglects to follow the employee’s investment instructions, or even neglects to inform the employee about how the plan works, the ERISA law governs employees’ rights and remedies. One of the “hottest” topics in ERISA litigation right now has to do with employees being charged excessive fees for management of their 401k accounts or whose investment funds are not being properly monitored for investment return. Those lawsuits maintain that investment management fees should have been lower or that employers failed to monitor the investment options and steer employees away from underperforming funds. The claims asserted maintain that the plan administrator had a fiduciary duty to act prudently and breached that duty by imposing excessive charges on plan participants or in their selection of imprudent investments.
What retirement plans are not covered by ERISA?
Not all retirement plans are governed by ERISA. Exceptions include the following:
- Individual retirement arrangements (IRA)
- State managed retirement savings programs such as CalSavers
- Rollover IRA accounts
- Government employee retirement plans
- Social Security
- “Church” plans
The keystone of ERISA coverage is that there must be employer involvement. Thus, an individual retirement plan set up by a self-employed individual is not subject to ERISA. Likewise, a federal appellate court in California recently ruled that CalSavers, a state-sponsored retirement savings program that is available for employees of employers that do not sponsor retirement programs, is not subject to ERISA. Many employees also choose to “roll over” their employer sponsored retirement plans into individual accounts. Such accounts are not subject to ERISA. However, brokers and financial advisors who assist employees and offer investment advice may be subject to fiduciary responsibility if they steer employees into excessive fee accounts or unsuitable or risky investments.
Social Security is also a separate program from ERISA and governed by its own set of laws and regulations.
While retirement plans established by employers are generally subject to ERISA, there are two principal exceptions – government plans and church plans. Thus, retirement benefits provided by a governmental employer such as a federal, state, or municipal entity would not be subject to ERISA; and issues arising in relation to such plans are governed by state laws.
In addition, benefit plans sponsored by religiously-affiliated entities may not be subject to ERISA, although the Internal Revenue Code permits such entities to elect ERISA coverage. Such entities include employees of an archdiocese or a church, synagogue, mosque, or temple or a related entity. Moreover, since many healthcare providers are affiliated with religious sponsors, their retirement plans may also be governed by ERISA.
Finally, employer-affiliated plans in which no employees participate are not governed by ERISA. But several years ago, the Supreme Court addressed this issue in a case known as Yates v. Hendon. There, the Court recognized that a “working owner” can be an ERISA plan participant.
How do you know if your retirement plan is covered by ERISA?
Employees can usually discern whether their retirement plans are governed by ERISA by examining employer-provided documentation. The ERISA law requires that employers provide employees who participate in covered benefit plans with a summary plan description that summarizes the relevant plan terms. Another indicator of whether ERISA applies is the filing of a Form 5500 (Annual Return/Report of Employee Benefit Plan), an annual report required to be filed with the U.S. Department of Labor by any employee benefit plan subject to ERISA. All Form 5500s are publicly searchable on the DOL’s website.
Therefore, while most employer-sponsored retirement plans are governed by ERISA, there are important exceptions that exclude certain plans and retirement arrangements from ERISA’s scope.