ERISA

What ERISA is

ERISA is the main federal law governing employer-sponsored benefit plans in the private sector. It does not require an employer to offer a retirement plan. It sets rules for employers that do. For a 401(k), ERISA:

• Requires the plan to give participants information about plan features and funding.

• Sets minimum standards for participation and vesting.

• Imposes fiduciary duties on the people who run the plan and manage its assets.

• Requires a claims and appeals process.

• Gives participants the right to sue for benefits and for breaches of fiduciary duty.

The Department of Labor’s Employee Benefits Security Administration (EBSA) enforces these rules. The IRS enforces the tax-qualification rules that sit alongside them. Governmental and church plans are generally outside ERISA, and so are plans that cover only a business owner and spouse.

Why it matters to employers

When you sponsor a 401(k), you or people at your company become ERISA fiduciaries by default. Fiduciaries must act solely in the interest of participants, act prudently, follow the plan documents, diversify plan investments and pay only reasonable plan expenses. A fiduciary who breaches those duties can be personally liable to restore losses to the plan.

ERISA is also the source of routine tasks: the summary plan description, the annual Form 5500, fee disclosures, the fidelity bond and timely deposit of employee contributions.

Common mistakes

• Thinking that hiring providers transfers all responsibility. You can delegate tasks, and some fiduciary roles, but you must still choose and monitor providers prudently.

• Keeping no record of decisions. A written record of how you chose investments and reviewed fees is your evidence of a prudent process.

• Confusing a fidelity bond with fiduciary liability insurance.

• Treating ERISA and tax rules as one. A plan can satisfy one and break the other.