Employee Retirement Income Security Act (ERISA) of 1974

Identification U.S. federal legislation

Date Signed into law on September 2, 1974

This law set minimum standards for pension plans offered by companies in private industry. The passage of ERISA resulted in sweeping reforms in the nature and structure of the private pensions that companies offer their retirees. The act guarantees payment of benefits even if a company goes bankrupt with no funds to pay pensions that have been promised.

Before 1974, there was no protection for individuals against losing their private pensions. The passage of ERISA was largely due to the default of the Studebaker pension fund in 1963. Studebaker, a South Bend, Indiana, automobile company, went into bankruptcy, and employees, many of whom had spent their entire careers with the company, lost some or all of their pensions. The company had an underfunded pension plan, meaning that there was not enough money set aside to pay the pensions that employees had been promised. Eventually, the United Automobile Workers union negotiated full benefits for some senior workers, but nothing was left for younger workers. This scandal led Senator Jacob Javits of New York to introduce into Congress a bill that would protect the benefits of millions of workers covered by pension plans. However, because of jurisdictional disputes, it was not until 1974 that the bill finally passed and became law.

ERISA established the Pension Benefit Guaranty Corporation (PBGC), which guarantees that workers will receive their pensions even though their employers may go out of business and cannot make the promised payments. The PBGC is funded by premiums charged to all sponsors of defined-benefit pension plans.

The act basically prohibited pay-as-you-go pension plans. Historically, many companies would not put aside money to pay workers enrolled in defined-benefit pension plans. Following the act’s passage, such plans had to be fully funded each year so that the money was available when the employees retire. ERISA, which is administered by the U.S. Department of Labor and the Internal Revenue Service (IRS), also requires pension plans to periodically provide workers and the government with information about the plan, including fund features and level of funding. Minimum standards are set for pension eligibility, vesting rights, and benefit accrual. Also, workers have the right to sue for benefits and breaches of fiduciary duty.

Impact

The original goal of ERISA was to protect the interests of pensioners, which was subsequently accomplished. Pension funds became more honestly administered, and in subsequent years, countless Americans received their promised pensions from the PBGC even though their employers went out of business. Private pensions represent a major element in the retirement security of many Americans, and the passage of ERISA protected this source of income.

Bibliography

Cooke, Ronald J. ERISA Practice and Procedure. Colorado Springs, Colo.: Shepard’s/McGraw-Hill, 1989.

Levin, Noel Arnold. ERISA and Labor-Management Benefit Funds. New York: Practicing Law Institute, 1975.

Sass, Steven A. The Promise of Private Pensions: The First Hundred Years. Cambridge, Mass.: Harvard University Press, 1997.