ERISA is the Employment Retirement Income Security Act, which was enacted in the early 1970s. The primary objective of ERISA is to give companies and private employees guidelines on how to manage employee benefit plans. Though ERISA does not demand an employer to develop a pension plan, it details that those who begin those plans should meet specific requirements. In other words, ERISA is generally a federal law, which tries to reduce the uncertainty which employees face estimating the value of their pension plans.
How ERISA Affects an Organization's Retirement Plan
ERISA has particular impacts on an organization’s retirement plan. Significantly, it accomplishes this by delegating regulatory supervision to specific governing systems. Notably, ERISA changes the rules for retirement plans. For instance, there are changes to the minimum fending requirements and regular vesting schedules. Under ERISA, a company having a pension plan ought to provide vesting options for its workers. Thus, after a certain number of years working, a worker’s pension plan will mature. Employees should be vested after a reasonably short period, and they should be fully vested once they attain three years or based on a two-six year graduated program. Similarly, before ERISA, not any of a pension plan’s unfunded liability was the company’s obligation. Hence, nearly all pension plans entailed a provision permitting the company to dismiss the plan under any circumstances. In fact, business struggle and merger were the two greatest causes of plan dismissal. However, ERISA affects the current organization's retirement plans as it does not allow such terminations with unexplained reasons.
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The law also states that all the retirement plan participants should invest in the accrued benefits in case a plan is aborted (Monson-Rosen, 2018) . ERISA also forbids an organization from getting rid of employees to keep them from reaching their pension benefits. Equally, under ERISA, retiring employers should provide all the financial information to the employee who is participating in the plan (Monson-Rosen, 2018). Correspondingly, ERISA also forces employees to take legal responsibility against organizations that tend to harass them. Also, ERISA provides solutions for participants on plan sponsors who go against their fiduciary duties. Regarding retirement programs, ERISA does not call upon businesses to give employee health insurance coverage. Conversely, if the company goes ahead to provide the health care plan, ERISA gives the guidelines for its set-up. Moreover, until ERISA permitted workers to create Individual Retirement Accounts, no such benefit was offered to the workers whose employer failed to have a pension plan.
Various Types of Retirements Plans
There are multiple types of retirement plans including the 401(k) plan, which gives an employee benefits that allows them to reduce the amount of income they pay taxes on in a year. On the other hand, the Individual Retirement Accounts (IRAs) helps one to invest in various kinds of investments after putting one's money into it (Phipps, 2019). Besides, a person can invest in an IRA in case one's employer does not offer a retirement plan. Also, there is the Roth IRA whose contributions are usually made with after-tax dollars, unlike the traditional IRA. In this type of retirement benefit plan, an individual can pull out contributions they have made without penalty before retirement as long as five years have passed since a person's first contribution. Lastly, there is the SEP IRA, which enables a person to contribute part of their income to their retirement account in case they are self-employed and do not have any employees.
Requirements of the Employee Retirement Income Security Act of 1974 (ERISA)
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law which sets the minimum standards for the voluntarily instituted retirement and health plans in the private sector to avail protection for people in these plans (U.S. Department of Labor, n.d.). ERISA calls for plans to avail members with information regarding the features and funding. Also, it sets the minimum standards for membership, vesting, benefit accumulation and funding; offers fiduciary duties for managers; gives members the right to litigate for benefits and breaking of fiduciary duty (U.S. Department of Labor, n.d.). If a benefit plan is dismissed, ERISA guarantees the payment of definite benefits via the Pension Benefit Guaranty Corporation (PBGC). Nevertheless, ERISA does not cover plans founded by governmental entities, churches, or those outside the U.S. (U.S. Department of Labor, n.d.).
Factors to Consider when Selecting a Retirement Plan
Some of the factors to consider when selecting a retirement plan include figuring out whether one needs the money immediately after retirement or after some time. Similarly, it is significant to put into consideration whether one would want to leave some of the retirement benefits to their heirs or they would receive the whole of it by themselves. Furthermore, it is essential to consider how much money one makes before they contribute to their retirement plan. Finally, one should consider their aim for the retirement plan as to whether it is for retirement income or for leaving a legacy. Normally, some individuals overinvest, hence, they have more money in retirement than they need.
Conclusion
It is crucial for employers to understand which regulations of ERISA apply to them and how employees can benefit from them. Retirement plans are beneficial to the present and the future of employees. Hence, it is essential for the employees to make the correct decisions regarding retirement plan choices and plan accordingly.
References
Monson-Rosen, M. (2018). US nonprofits: Understanding the Employee Retirement Income Security Act . Retrieved from mission box: https://www.missionbox.com/article/171/us-nonprofits-understanding-the-employee-retirement-income-security-act
U.S. Department of Labor. (n.d.). Employee Retirement Income Security Act (ERISA). Retrieved from https://www.dol.gov/general/topic/retirement/erisa
