Millions of employees have contributed to 401(k) plans without worrying that their employer will raid their account to fund a weekend in Vegas. For that, you can thank the Employee Retirement Income Security Act (ERISA), which turns 50 this fall. Likewise, if you’re fortunate enough to have a traditional pension, ERISA protects your benefits if your employer goes out of business.
But as ERISA celebrates its golden anniversary, it isn’t without its critics. Some analysts say ERISA has made it too expensive for companies to offer traditional pensions, accelerating their demise. And while legislative updates to ERISA have made it easier than ever for many people to save for retirement in 401(k) plans, nearly one-third of private-sector workers lack access to an employer-sponsored plan, putting their retirement security at risk.
The beginning
As is the case with many laws designed to protect workers, ERISA was born in the wake of a catastrophe. In 1963, car manufacturer Studebaker ceased production at its plant in South Bend, Ind., and shortly afterward it terminated its pension plan. Some 4,000 workers, ranging in age from 40 to 59, received about 15 cents for each dollar of benefits they had been promised.
The failure of the Studebaker pension, as well as the implosion of several smaller plans, galvanized calls for reform, leading to the enactment of ERISA in 1974. A key component of the law was the creation of the Pension Benefit Guaranty Corp. as a backstop for failed pension plans.
As companies shifted to employer-sponsored 401(k) plans in the 1980s, ERISA was adapted to protect workers who invested in those plans, too. Some of the most sweeping changes came in the 2000s, when Congress enacted legislation that raised contribution limits, allowed older workers to make catch-up contributions and opened the door to enrolling employees in the plans automatically, among other things.
ERISA and you
If you’re eligible for a traditional pension and your employer is unable to fulfill its obligations, the PBGC will take over the plan and pay your benefits, up to limits set by law. In 2024, the maximum payout is $85,296 a year, or $7,108 a month, for a 65-year-old retiree. (The monthly payment is lower if you retire earlier or elect survivor benefits.)
The PBGC also provides a database you can use to track down pension benefits you may have earned from a former employer that has gone out of business. The database includes names of people who couldn’t be located when an employer terminated a private-sector plan.
ERISA doesn’t protect employees who contribute to 401(k)s from investment losses if the stock market goes into a tailspin. However, the law requires your employer to keep plan assets in an account separate from the business, so if your company files for bankruptcy, creditors can’t go after assets in the plans.
The Department of Labor, which enforces ERISA, requires employers to provide 401(k) plan participants with a series of annual and quarterly disclosures, including information on account balances, administrative expenses and investments fees. A 2021 report by the Government Accountability Office found that many plan participants have difficulty understanding how fees affect their investments, with 41% incorrectly stating that they don’t pay any fees. It’s important to review fee disclosures because even modest fees can significantly reduce your returns over time.
The drawbacks
Although ERISA has erected guardrails around both traditional and defined-contribution plans, some critics say the law has discouraged companies from offering these plans at all. In the case of traditional pensions, ERISA requires companies to pay premiums to the PBGC and comply with accounting standards designed to ensure that the plan can meet its obligations. Some academics believe these requirements have discouraged companies from providing pensions, which currently cover only about 15% of private-sector workers.
However, numerous other factors have likely contributed to the decline of traditional pensions, including global competition from companies that don’t offer them, says Lloyd Katz, vice chairman of the American Academy of Actuaries pension committee.
With company-sponsored 401(k) plans, employers can offer workers a way to save for retirement without the cost and investment risk associated with traditional pensions. Nonetheless, millions of workers still lack access to these plans, says Kevin Crain, executive director of the Institutional Retirement Income Council, a think tank for companies that provide annuities and other types of retirement income. While 95% of large employers offer a retirement plan, fewer than half of companies with fewer than 100 employees provide them, even though such businesses account for 35% of private-sector workers. In surveys, small-business owners say the cost of establishing and administering a plan is one of the reasons they don’t offer this benefit.
If your employer doesn’t provide a 401(k) or pension, you can contribute the maximum to an IRA — $7,000 in 2024, or $8,000 if you’re 50 or older — and deduct the entire amount, no matter how much money you make. (Workers for companies that offer a 401(k) or pension can’t deduct IRA contributions if their income is higher than specific thresholds.)
If you work for yourself, you have even more options. You can set up a solo 401(k) plan and make elective deferrals up to the 401(k) maximum for employees, including catch-up contributions if you’re eligible. As an employer, you can also contribute up to 25% of your compensation, for a combined total of up to $69,000 in 2024, or $76,500 if you’re 50 or older.
Another option is a SEP IRA, which has fewer administrative requirements than a solo 401(k). In 2024, you can contribute the lesser of 20% of your net self-employment income or $69,000 to a SEP IRA.
