There are several specific means by which ERISA regulates employee benefit plans. These include:
(1) reporting and disclosure requirements;
(2) fiduciary duty obligations;
(3) establishment of eligibility and vesting rules for employee benefit plans;
(4) establishment of funding requirements for defined-benefit plans; and
(5) rules for modification of benefit plans.
- ERISA’s reporting and disclosure requirements obligate employers to provide certain information about employee benefit plans to both employees and to the federal government. Employees must be provided with summary plan descriptions, which describe in understandable terms the rights of participants and beneficiaries of the employee benefit plan, exactly what the provided benefits are, and the specific responsibilities of the employer and the beneficiaries or participants. Employers are also obligated to file an annual report with the government concerning the financial operation of the plan. ERISA was amended in 2006 by the Pension Protection Act as a result of the various abuses by WorldCom and Enron. Employees who worked for these companies had heavily invested their retirement funds in the company’s stocks. Under the amendment, employees/participants have certain rights and must be notified in advance of the blackout periods in which they will be prohibited from trading in their plan accounts, and employees/participants with defined contribution plans that invest in publicaly traded stock of their employer must be allowed to diversify their accounts into at least three other investment options and must be notified of such rights in a timely fashion.
- ERISA next establishes standards that must be adhered to by persons who manage, administer, or coordinate an employer’s employee benefits plans. These persons may be employer management officials, if the employer administers its own plans, or they may be outside consultants or officials of insurance companies or other entities that the employer contracts with to administer its plans. Under ERISA, all persons who are authorized to make decisions about the placement and investment of plan funds or who offer investment advice concerning a plan are considered to be fiduciaries. Fiduciaries may be generally defined as persons who hold funds in trust for others or who hold positions in which trust and confidence are placed by others. ERISA requires that fiduciaries act solely in the best interest of participants and beneficiaries of the employee benefit plan, and prohibits them from acting in their personal best interest or for the interest of the employer offering the employee benefit plan. Fiduciaries are also required to manage funds with the care and skill that a prudent person would employ in such duties and to meet specific ERISA requirements for diversification of investments and avoidance of conflicts of interest. For example, it would be a prohibited conflict of interest for an ERISA plan administrator who was an employer management official to loan plan funds to the employer to be used for non-plan purposes of the employer. Finally, as part of their fiduciary duties under ERISA, plan administrators and advisors are required to provide plan participants and beneficiaries with information concerning the plan’s operations, changes in the plan, and what benefits particular employees are entitled to at any given time under terms of the plan.
Effective 2006, public companies that allow an employee to invest into an employer stock fund must be notified of his/her right to diversify into other non-employer stock investment. This amendment was also in response to the Enron, WorldCom and other companies’ fiasco and lack of diversification by fiduciaries of retirement plans.
- A third aspect of ERISA’s regulatory scheme is that it establishes eligibility and vesting rules related to employee pension plans. In terms of eligibility, ERISA provides that any employee age 21 or older who has completed one year of service with a company must be permitted to participate in a pension plan, if the employer offers one. Vesting is a term meaning that a person acquires an irrevocable right or interest in a benefit provided by a pension plan. ERISA provides that an employee’s rights to receive pension benefits under an employer’s pension plan must become 100 percent vested, or nonforfeitable, after the employee has completed five years of employment, or the vesting period may be extended to as long as seven years if an employee is vested in portions of his or her pension rights each year. For example, such gradual vesting may provide that an employee is 15 percent vested in his or her pension for each completed year of employment. Please note that becoming 100 percent vested in a pension plan does not mean that an employee who has completed five or seven years of service will be entitled to the same amount of pension as an employee who has completed 30 years of service with the employer. It also does not mean that after an employee completes five or seven years of service, he or she may immediately start collecting a retirement pension. Full vesting simply means that, based on the standards set in the particular pension plan, the employee will receive at least some retirement pension from the employer when he or she reaches retirement age, even if the employee later leaves the employer and goes to work for another company prior to reaching retirement age.
- A fourth aspect of ERISA regulation is its establishment of funding requirements for pension and employee benefits plans. In general terms, ERISA requires that employers must adequately fund pension and other employee benefit plans so as to pay the benefits provided by the plans. The statute also requires that employers that have established defined-benefit plans, which guarantee payments of specified amounts of money once an employee becomes entitled to a pension, must purchase insurance from the Pension Benefit Guarantee Corporation, a federal insurer established by ERISA, so that employees will receive promised benefits even if the plan suffers losses or is terminated.
- A fifth aspect of ERISA regulation is its requirement that employee participants and beneficiaries in employee benefits plans be provided information about plan modifications or even possible modifications that are being “seriously considered” by the employer, that is, specific proposals for changes that are being discussed by top management, which has the authority to actually make the changes if it so wishes. The purpose of this requirement is to keep employees abreast of where they stand in relation to benefits plans so that they can make intelligent decisions involving their benefits. For example, if an employee is informed that her employer is seriously considering lowering pension benefits in the future, and she is already of retirement age, she might choose to retire immediately rather than choose to work an additional one or two years.