The Employee Retirement Income Security Act (ERISA) of 1974 is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. In a 401k, ERISA is particularly significant because it ensures that the entities that manage and control plan assets, known as fiduciaries, follow specific rules designed to protect the interests of the participants in retirement plans and their beneficiaries.
Under ERISA, fiduciaries must:
- Act solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them.
- Carry out their duties with skill, prudence, and diligence.
- Follow the plan documents (unless inconsistent with ERISA).
- Diversify plan investments to minimize the risk of large losses.
- Avoid conflicts of interest in the form of transactions that could benefit parties related to the plan.
ERISA also requires plans to provide participants with information about plan features and funding, and it gives participants the right to sue for benefits and breaches of fiduciary duty. Additionally, if a defined plan is terminated, ERISA guarantees payment of certain benefits through a federally chartered corporation, the Pension Benefit Guaranty Corporation (PBGC).
In the 401(k) industry, ERISA’s impact is profound, shaping the way plans are structured, and administered, and how they communicate with participants. It influences the development of investment options, the management of plan costs, and the enforcement of fiduciary responsibilities.