The Employee Retirement Income Security Act (ERISA) was enacted on Labor Day 1974 by President Gerald Ford to provide greater protection for employees participating in workplace benefit plans. More particularly, as noted by the United States Supreme Court in Fort Halifax Packing Co. v. Coyne, “to safeguard employees from the abuse and mismanagement of funds that had been accumulated to finance various types of employee benefits.”
The upcoming 50th anniversary provides an opportunity to reflect on some of the ways in which ERISA strengthened and improved workplace benefit plans and established meaningful federal oversight.
Protections, federal oversight added by ERISA
Most employee benefit plans became subject to ERISA including retirement and health and welfare plans. Governmental oversight of ERISA is divided among the U.S. Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC).
ERISA Title I enacted rules for reporting and disclosure, vesting, participation, funding and fiduciary conduct. Title I also established civil and criminal enforcement and administration by the DOL’s Employee Benefits Security Administration (EBSA). According to the EBSA’s most recent data, EBSA oversees approximately 2.8 million health plans, 619,000 other welfare benefit plans and 765,000 private retirement plans. These ERISA-covered plans cover 153 million workers, retirees and dependents who participate in private sector retirement and welfare plans that hold an estimated $12.8 trillion in assets.
EBSA enforcement actions in 2023 recovered over $931 million dollars for benefit plans, participants and beneficiaries. Also in 2023, EBSA closed 196 criminal investigations with 77 guilty pleas or convictions and indicted 60 individuals, including plan officials, corporate officers and plan providers. Without ERISA and the focused enforcement by the EBSA, one could speculate that only a fraction of the recoveries and criminal indictments would have occurred.
ERISA Title IV established the PBGC, which administers defined benefit pension plans and oversees an insurance program ensuring that employees will receive some level of a pension in the event that an employer or plan could not meet its obligations. Title IV was enacted in response to several high-profile pension plan failures including the Studebaker-Packard Corporation car pension plan that left employes without promised pensions.
One of the most important features of ERISA was the degree to which over time it has expanded the reporting and disclosure obligations of employers and other sponsors of ERISA plans. Reporting and disclosure requirements include annual reporting to the government and to participants, benefit statements, disclosure of plan terms and conditions through summary plan descriptions and disclosure of retirement plan fees and expenses. The retirement plan disclosure requirements enacted by ERISA have been significantly expanded by the EBSA. This includes greater transparency of plan fees and expenses that over time has resulted in lower fees and expenses for participants. The importance of fee reduction has been magnified over time as defined contribution plans such as Section 401(k) plans have taken over from traditional pension plans as the source of retirees’ primary retirement income other than Social Security. Each 401(k)-plan dollar not paid for plan administration and investment expenses can accumulate tax-free to provide greater retirement income for plan participants.
Fiduciary oversight over ERISA plans
ERISA also added specific requirements for certain people who interact with benefit plans including a comprehensive set of fiduciary standards on parties that administer benefit plans and invest assets.
ERISA requires employers and other fiduciaries to act solely in the interests of plan participants and beneficiaries. Fiduciaries must act with the care, skill, prudence and diligence under the circumstances that a prudent person acting as a fiduciary and familiar with retirement plan matters would use to manage a retirement plan.
As a result, fiduciaries must make a careful inquiry into the merits of any investment offered by the retirement plan. ERISA added prohibitions on transactions between benefit plans and related parties called prohibited transactions. These rules prohibit business owners from borrowing retirement plan assets to use for business purposes that could jeopardize retirement savings.
ERISA preemption of state laws impacting benefits
In addition to providing greater protections for employees, Congress wanted benefits plans subject to a uniform body of federal law. ERISA Section 514(a) provides that ERISA preempts or supersedes any and all state laws insofar as they relate to any employee benefit plan (subject to ERISA). This provision is the basis on which ERISA bars state law regulation of benefit plans and acts as a defense against state-law causes of action relating to employee benefits. By enacting Section 514(a), Congress sought to eliminate conflicting regulations on benefit plans by different states and ensure that plans and plan sponsors would be subject to a uniform body of benefit law. The goal was to minimize the administration and financial burden of complying with conflicting directives among states and between states and the federal government. Congress also wanted uniform civil enforcement remedies, and thus ERISA Section 502 provides the exclusive source for claims under ERISA.
In recent years, states and even municipalities have attempted to enact laws and regulations that impose benefit obligations on private-sector employers. Many of these laws have been struck down as being prohibited or “preempted” by ERISA.
For example, on March 11, 2024, the U.S. District Court for the Northern District of Illinois ruled that ERISA preempted an Illinois “equal pay for equal work” law requiring temporary agencies to pay temporary employees who work at a particular site for more than 90 days within a year either “equivalent benefits” as the lowest paid, comparable, directly-hired employee at the third-party client or “the hourly cash equivalent of the actual cost of benefits.”
In summary, ERISA added numerous protections for workplace benefit plans and a regulatory structure for robust oversight that should be celebrated on ERISA’s 50th anniversary.
John E. Rich, Jr. chairs the Tax Department at McLane Middleton, P.A., specializing in employee benefits, pension, ERISA and tax-related matters. He can be reached at john.rich@mclane.com or 603-628-1438.
