When workers reach retirement age, they should be able to depend on their employer-provided retirement plans. They need to know that the money they put into the system is all there, and that it has been properly managed over the years.
The Employee Retirement Income Security Act, or ERISA, is a federal law that aims to give workers this kind of security by placing certain requirements on privately-managed employee retirement plans. However, the system doesn’t always work smoothly. ERISA doesn’t cover every kind of plan, nor every kind of employee.
Complex lawsuit
An ongoing court case illustrates how complicated the issues can become. According to a recent news story, a group of former financial advisors who once worked for the financial giant Morgan Stanley filed suit against their former employer, alleging that Morgan Stanley had refused to pay them retirement benefits worth hundreds of thousands of dollars.
Before they could even get to the issue of whether their former employer had to pay them, or how much, the plaintiffs in this case had to prove that their benefits were covered by ERISA. After years of litigation, a judge in the case ruled that the benefits, which were part of a deferred compensation plan, were in fact covered by ERISA. The case is now headed toward arbitration.
What is covered?
Generally speaking, there are two types of retirement plans covered under ERISA:
- Defined benefit plans: These plans promise retired workers a specified amount as a monthly payment. The amount may be designated by a certain dollar amount, or it may be arrived at through a formula based on the worker’s pre-retirement wages, their years of service and other factors.
- Defined contribution plans: These plans do not promise a specified amount at retirement. Instead, they work by having the employee, the employer (or both) contribute a designated amount to a retirement account with every paycheck. A typical example is an employer-provided 401(k) plan in which an employer matches an employee’s contributions with every paycheck.
These are relatively broad categories that encompass a wide variety of retirement plans. However, ERISA doesn’t cover everything.
Generally, ERISA does not cover retirement plans from government agency employers or churches, nor does it cover many retirement plans that are managed through workers’ compensation or disability programs.
