Millions of employees have contributed to 401(k) plans without worrying that their employer will raid their account to fund a weekend in Vegas. For that, you can thank the Employee Retirement Income Security Act (ERISA), which turns 50 this fall.
Likewise, if you’re fortunate enough to have a traditional pension, ERISA protects your benefits if your employer goes out of business.
But as ERISA celebrates its golden anniversary, it isn’t without its critics. Some analysts say ERISA has made it too expensive for companies to offer traditional pensions, accelerating their demise. And while legislative updates to ERISA have made it easier than ever for many people to save for retirement in 401(k) plans, nearly one-third of private-sector workers lack access to an employer-sponsored plan, putting their retirement security at risk.
As is the case with many laws designed to protect workers, ERISA was born in the wake of a catastrophe. In 1963, car manufacturer Studebaker ceased production at its plant in South Bend, Ind., and shortly afterward it terminated its pension plan. Some 4,000 workers, ranging in age from 40 to 59, received about 15 cents for each dollar of benefits they had been promised.
The failure of the Studebaker pension, as well as the implosion of several smaller plans, galvanized calls for reform, leading to the enactment of ERISA in 1974. A key component of the law was the creation of the Pension Benefit Guaranty Corp. as a backstop for failed pension plans.
As companies shifted to employer-sponsored 401(k) plans in the 1980s, ERISA was adapted to protect workers who invested in those plans too. Some of the most sweeping changes came in the 2000s, when Congress enacted legislation that raised contribution limits, allowed older workers to make catch-up contributions and opened the door to enrolling employees in the plans automatically, among other things.
ERISA doesn’t protect employees who contribute to 401(k)s from investment losses. However, the law requires your employer to keep plan assets in an account separate from the business, so if your company files for bankruptcy, creditors can’t go after assets in the plans.
Although ERISA has erected guardrails around both traditional and defined-contribution plans, some critics say the law has discouraged companies from offering these plans at all. In the case of traditional pensions, ERISA requires companies to pay premiums to the PBGC and comply with accounting standards designed to ensure that the plan can meet its obligations. Some academics believe these requirements have discouraged companies from providing pensions, which currently cover only about 15 percent of private-sector workers.
However, numerous other factors have likely contributed to the decline of traditional pensions, including global competition from companies that don’t offer them, says Lloyd Katz, vice chairman of the American Academy of Actuaries pension committee.
