Do ERISA regulations require all companies to offer a retirement plan?
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Employers are not required to offer retirement plans to their employees. Having a retirement plan is purely voluntary on the employer’s part. If your employer doesn’t offer a retirement plan, all you can do is save for your own retirement or look for a different job where the company offers a retirement plan.
The Employee Retirement Income Security Act (ERISA) is a complex federal law governing employer-offered retirement and health benefit plans. If employers choose to offer retirement plans, they must follow strict ERISA guidelines regarding how the plans are managed, operated, and presented to employees.
What are the Types of Employer-Provided Retirement Plans?
There are two types of plans, both regulated by ERISA:
A defined benefit plan (often called a pension plan) in which the retired employee receives a fixed amount of money per month upon retirement. It’s called a “defined benefit” plan because the benefit you will receive (the monthly payment) is defined. The amount can be defined as either a specific amount or as a percentage of the employee’s income. This plan is rare nowadays because of its expense for the employer and the employer’s obligation to adequately fund the plan month-after-month, regardless of how long the employee lives or how the economy or company are doing.
A defined contribution plan doesn’t promise or define certain payments for the employee after retirement. Rather, it’s a tax-advantaged saving plan under which the “contributions,” or amounts paid into the plan monthly, are defined. Typically, the employee elects to pay a certain percentage of his or her salary or wages each month (e.g. 1% - 5%); often, the employer will match some or all of that (e.g., matching 50% of the first 3% contributed by the employee). This type of plan, which is very similar to an IRA, is more common because the employer’s liability, or obligation to pay, is not open-ended. Instead of paying month after month, for as long as the employee lives, the employer simply makes the defined contributions each month so long as the employee is working there. The amount the employer puts in varies, depending on the plan, but the amount is known and capped. (See our section on the various forms of defined contribution plans.)
Why Would Employers Offer Retirement Plans?
Whether it’s a defined benefit or defined contribution plan, a retirement plan clearly costs the employer something—depending on the type of plan, possibly a great deal. Why then would employers voluntarily go to this expense?
Even though employers are not required to offer retirement plans, there are several benefits associated with providing these types of retirement plans to employees.
- Offering a retirement plan attracts and retains top employees, especially in a job sector where there may be a shortage of talented workers.
- Maintaining a retirement plan that has options such as profit sharing, stock bonuses, or matching contributions encourages employees to continue working with employer for a long period of time, to take advantage of the employer match, the company’s growth, or the company’s economic performance.
- Tax benefits are also available to employers who offer retirement plans. For example, if employers offer "matched" contributions to a retirement account, or create a pension fund for employees, employers can deduct the cost from their business taxes due.
ERISA Protections for Employees
First, the employer must provide participants with several important documents about the plan, such as how the plan operates, or how the plan is funded. Employees don’t have to blindly trust their employer: under ERISA, they must receive the information necessary to make informed choices.
Second, ERISA sets rules for participation (who is eligible for the plan), vesting (to oversimplify, when the money in an employee’s account or plan becomes irrevocably theirs, so they don’t lose it even if they switch jobs or stop working), funding (how money is put into the plan; how adequate support or funding for the retirement plan is guaranteed), and how benefits under the plan accrue or accumulate. ERISA mandates or requires a structure that protects employees’ rights to their retirement benefits.
Third, ERISA makes the plan’s “fiduciaries” (the people who are in control of the plan) legally accountable for their actions; they are required to act prudently in the best interests of their investors. If the fund is mismanaged or there is fraud, employees who suffered losses can sue the fiduciary for “breach of fiduciary duty” and can potentially recover compensation for the loss.
And fourth, it doesn’t allow plans to be terminated (or ended) at will. If a plan is terminated, the employees in the plan may be eligible to receive at least some payments or benefits from an organization called the Pension Benefit Guaranty Corporation (a government-created entity).
While nothing can ever make any investment 100% safe, ERISA adds a great deal of security to employer retirement plans. It “levels the playing field” between employers (who generally have the money, the expertise, and the power) and employees by putting out minimum standards to which employers must adhere and ensuring a high-degree of transparency in terms of how retirement plans function.
What Steps Should an Employer Take in Order to Offer a Retirement Plan?
Employers who choose to offer retirement plans must comply with all anti-discrimination legislation in doing so. This means among other things, that employees must be given an equal opportunity to take advantage of the retirement plan, regardless of their age. This said, as long as the rules are applied evenly to all employees, they do not have to be changed or adjusted to help older employees. For example, if an employee must work there for at least a year before even beginning to participate in the plan, and doesn’t fully “vest” (or “own” all the money in his or her plan) for, say, ten years after that, an employee who starts working at the company late in his or her career may not have enough time to fully take advantage of the plan.
Further, ERISA mandates that the funds set aside for retirement plans must be managed with a high degree of care in order to protect the interests of employees. Other ERISA mandates stipulate that once a retirement plan vests, the employer must provide the promised vested benefits—that is, once an employee has worked long enough to “own” the money or benefits in his or her account, the employer must make sure that he or she receives them.
In short, if an employer is going to offer a retirement plan, it must do it right—especially so since ERISA only sets the “floor” or minimum requirements for retirement plans. It is possible that state law may impose additional obligations, so it is important for employers to make sure they comply with their state’s laws and regulations as well as ERISA.
An important note: If you are concerned about the retirement plan offered by your company or that the funds in your account are not being prudently handled, you should contact an attorney or your state Department of Insurance.