Retirement Plans

ERISA (Employee Retirement Income Security Act) and 401(k)

Since its inception in 1974, the Employee Retirement Income Security Act, or ERISA, is a federal law that sets and attempts to regulate minimum standards for retirement and health benefit plans in the private sector. ERISA is not a law that mandates that retirement and health plans be established. It only requires compliance for those companies who offer plans to their employees. ERISA governs minimum standards for retirement, health and other welfare benefit plans (e.g. life, disability and apprenticeship plans). Under ERISA, individuals who manage plans and other fiduciaries must meet particular standards of conduct. It also incorporates detailed provisions for how to report to the government and how to fully disclose information to participants. Provisions are also in place for making sure plan funds are protected and that participants who qualify get their benefits. Expansion of ERISA to include new health laws has occurred since 1974. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was an amendment to ERISA that makes for a limited time continuation of health care coverage for employees and their beneficiaries. If not for this amendment, certain events would most likely have resulted in a reduction in benefits. For even more bolstering, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) made further changes to ERISA in order to make health care coverage more portable and secure for workers.

With regard to 401(k) plans, the recent case of La Rue v. DeWolff might have a significant impact on ERISA and the responsibilities of employers providing these defined contribution plans. In this case, the United States Supreme Court ruled that in certain circumstances an employer can be liable if financial loss occurs to individual employees’ 401(k) accounts. LaRue v. DeWolff turned its sights on employee rights under ERISA as it applies to investments. The employee in LaRue claims that his former employer was responsible for making requested investment changes that would have positively affected investment growth. Said employer neglected to make the changes for the employee which allegedly resulted in a financial loss of $150,000. Under these circumstances and conditions, the employer is liable and can be held responsible for replenishing monies lost because of the employer’s negligence. This ruling may encourage more lawsuits by individual employees who have plans and have suffered similar losses under similar circumstances. In this case, the ERISA plan was a defined contribution plan. This means it was a pension plan which has bookkeeping for individual participant accounts. Benefits based on amount contributed are subject to amount of salary, losses and forfeitures. The Supreme Court ultimately held that because of this service and benefit linkage within 401(k) defined contribution plans that it is more than reasonable and necessary that the employer’s breach of fiduciary duty be remedied under ERISA. Even if assets in an individual account and not in the ERISA plan overall are affected; individual account assets are under the umbrella of the ERISA plan.

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