U.S. Congress Protects Employee Benefits Summary

  • Last updated on November 10, 2022

By establishing fiduciary, funding, vesting, and disclosure rules and plan termination insurance, ERISA attempted to protect employees’ rights to retirement and other benefits.

Summary of Event

On September 2 (Labor Day), 1974, President Gerald R. Ford signed the Employee Retirement Income Security Act of 1974 (ERISA) into law. ERISA established complex rules concerning employee benefit plan disclosure, fiduciary responsibility, funding, and vesting. Vesting refers to an employee’s nonforfeitable right to a pension, a right earned, for example, after a fixed number of years of service. The law also established pension plan termination insurance and the Pension Benefit Guaranty Corporation. Pension Benefit Guaranty Corporation Employee Retirement Income Security Act (1974) Employment;retirement benefits Retirement benefits [kw]U.S. Congress Protects Employee Benefits (Sept. 2, 1974) [kw]Congress Protects Employee Benefits, U.S. (Sept. 2, 1974) [kw]Employee Benefits, U.S. Congress Protects (Sept. 2, 1974) [kw]Benefits, U.S. Congress Protects Employee (Sept. 2, 1974) Employee Retirement Income Security Act (1974) Employment;retirement benefits Retirement benefits [g]North America;Sept. 2, 1974: U.S. Congress Protects Employee Benefits[01670] [g]United States;Sept. 2, 1974: U.S. Congress Protects Employee Benefits[01670] [c]Business and labor;Sept. 2, 1974: U.S. Congress Protects Employee Benefits[01670] [c]Laws, acts, and legal history;Sept. 2, 1974: U.S. Congress Protects Employee Benefits[01670] Javits, Jacob K. Long, Russell B. Williams, Harrison A., Jr. Nixon, Richard M. [p]Nixon, Richard M.;Employee Retirement Income Security Act Dent, John H. Ford, Gerald R. [p]Ford, Gerald R.;Employee Retirement Income Security Act Nader, Ralph

ERISA was the culmination of eight years of investigations, hearings, and legislative proposals that responded to reports of abuse in the private pension and group insurance system, particularly with respect to the absence of vesting and funding standards in some plans. ERISA mandated practices that had become increasingly common among large corporate plans. The law’s supporters thus included a wide range of interests, such as the American Bankers’ Association and the United Auto Workers union. ERISA was moderate in scope and did not include certain reforms, such as the mandating of private employee benefit coverage for everyone in the workforce, that were advocated at the time by Ralph Nader and other public interest advocates.

The American Express Company adopted the first pension plan in the United States in 1875. By 1940, more than four million American employees were covered by private pensions. The Revenue Act of 1942 Revenue Act (1942) allowed a company to receive a guarantee that pension contributions would be tax-deductible, and this provision encouraged growth in coverage. The War Labor Board also encouraged growth during World War II by exempting employee benefit plans from wage freezes. A similar provision was made during the Korean War. Furthermore, in 1948 the Seventh Circuit Court of Appeals upheld a ruling in a case involving the Inland Steel Company that pensions are mandatory subjects of collective bargaining. This decision opened the door to collective bargaining by unions for employee benefits. Pension assets rose from $2.4 billion in 1940 to $52 billion in 1960. By 1970, more than twenty-six million American employees were covered by private pensions.

In 1958, the Welfare and Pension Plans Disclosure Act Welfare and Pension Plans Disclosure Act (1958) (WPPDA) established disclosure requirements for employee benefit plans. The WPPDA was amended in 1962 to establish criminal sanctions. The WPPDA’s disclosure requirements, however, were limited in scope.

In 1963 and 1964, pension plans gained public attention when Studebaker’s factory in South Bend, Indiana, closed. About forty-five hundred Studebaker employees under the age of sixty received only 15 percent of the retirement benefits they had earned, and many received no benefits at all. President John F. Kennedy Kennedy, John F. had appointed a Committee on Corporate Pension Funds in 1962, and in 1965 the committee recommended stricter standards for plan funding and vesting of employees’ pension benefits. This recommendation led to a 1968 House bill that would have established fiduciary standards for administrators of employee benefit plans, but the bill died.

In a message to Congress on December 8, 1971, President Richard M. Nixon proposed legislation to establish vesting and fiduciary standards and to permit individual retirement accounts Individual retirement accounts (IRAs). A House Banking and Currency Committee task force investigated pension reform that year as well. In 1972, the National Broadcasting Company National Broadcasting Company (NBC) encouraged popular support for pension reform legislation by airing a television news documentary, Pensions: The Broken Promise, that depicted abuses in the pension system.

The House Ways and Means Committee, chaired by Wilbur Mills, Mills, Wilbur held hearings in 1972 on H.R. 12272, the Nixon administration’s bill. H.R. 12272 included provisions on disclosure, fiduciary responsibility, and vesting, but not on funding and plan termination insurance. The most controversial part of the bill was its proposal for increasing the limits on the tax deductibility of pension benefits for self-employed individuals and their employees (Keogh or HR 10 plans) Keogh plans and IRAs. More than twenty national and local bar associations and the American Medical Association testified in favor of the Keogh plans and IRAs. The AFL-CIO (American Federation of Labor-Congress of Industrial Organizations) AFL-CIO[Aflcio] strongly opposed the Nixon bill because of these provisions. The bill died in the House.

In September, 1972, the Senate Labor and Public Welfare Committee, chaired by Harrison A. Williams, Jr., reported out a bill that would have regulated pension plans, but the bill died when Senator Russell B. Long (Democrat from Louisiana) argued that it was primarily tax legislation and so was the province of his Senate Finance Committee. The Senate Finance Committee reported the bill out only after removing its provisions concerning vesting, funding, and termination insurance.

By early 1973, public support for pension reform was widespread, and jurisdictional disputes were to be swept aside. Congressman Carl Dewey Perkins, Perkins, Carl Dewey chairman of the Education and Labor Committee, testified that he had received several thousand letters in support of pension reform. Later that year, Ralph Nader and Kate Blackwell Blackwell, Kate published You and Your Pension, You and Your Pension (Nader and Blackwell) a book that encouraged popular support for pension reform by providing examples of insufficiently funded plans, the absence of vesting rules, and excessively complex plan provisions.

In September, 1973, the Senate Labor and Public Welfare Committee reported out a bill cosponsored by Jacob K. Javits (Republican from New York) and chairman Harrison Williams (Democrat from New Jersey). At the same time, the Senate Finance Committee sponsored a complementary bill. The two bills were merged into one, S. 4, which passed the Senate. The bill set minimum fiduciary, funding, portability, and vesting standards, established plan termination insurance, established IRAs, and extended limits on Keogh plans. (“Portability” refers to the ability of employees to transfer pension assets to new employers or to centralized trust funds when they change jobs.) Weeks later, in October, 1973, the House Education and Labor Committee reported H.R. 2, which omitted S. 4’s provisions on portability, Keogh plans, and IRAs but was similar to it in other respects.

During 1972 and 1973, the House Ways and Means Committee held hearings concerning H.R. 12272; the Senate Labor and Public Welfare Committee held hearings concerning S. 4; and the General Subcommittee on Labor, chaired by John H. Dent (Democrat from Pennsylvania), held hearings concerning H.R. 2. In the course of these hearings, organized labor gave only mixed support to pension reform legislation. For example, a representative of the Amalgamated Clothing Workers Union testified that jointly sponsored labor-management trusts should be exempt from retirement legislation.

In fact, industry groups such as the national Chamber of Commerce and the American Bankers’ Association, along with Towers, Perrin, Foster, and Crosby, a consulting firm, gave stronger support to the proposed vesting, disclosure, and fiduciary rules than did the AFL-CIO. The AFL-CIO did not testify during the S. 4 and H.R. 2 hearings. The United Steelworkers of America, United Steelworkers of America the United Auto Workers, United Auto Workers and other industrial unions, along with some craft unions, did not support the proposed legislation, especially its termination insurance provisions, probably because pension funds in the steel and auto industries were underfunded. In testimony concerning H.R. 2, Ralph Nader excoriated the labor movement for its weak support of pension legislation.

In February, 1974, the House Ways and Means Committee passed a revised H.R. 2 bill that included improvements to Keogh plans and established IRAs. The House-Senate conference committee reported a final compromise version of H.R. 2 and S. 4 in August, 1974. The conference committee’s bill passed the Senate unanimously, 85-0. In the House, only two representatives voted against ERISA. President Ford signed the bill on September 2, 1974.

Significance

ERISA established new rules on disclosure, vesting, eligibility, funding, and fiduciary responsibility. It established individual retirement accounts and increased the amount that self-employed individuals could contribute to their own pension plans. It established limits on contributions and benefits to highly paid individuals and restated the Internal Revenue Code’s rules on integration of pensions with Social Security benefits. It also established the Pension Benefit Guaranty Corporation and a tax of one dollar per participant on single-employer plans to cover the newly created plan termination insurance.

With respect to disclosure, ERISA required that plan sponsors (both single employers and multiemployer trusts that sponsor benefit plans) provide participants with a summary of the formal, relatively technical, plan document that governs their pension plan. The summary, called a summary plan description, was required to be written in a manner calculated to be understood by the average plan participant. ERISA required that each plan administrator produce a detailed annual report that, in the case of pension and profit sharing plans, was required to be audited by a certified public accountant. It also required plan administrators to provide each plan participant with a summary of this annual report. Furthermore, the law required that the plan administrator provide an estimate of a participant’s benefit on request.

With respect to eligibility, ERISA required that plans could not require more stringent eligibility requirements than participants being twenty-five years of age or older, with at least one year of service, although with full immediate vesting, plans could require three years of service. Plans could no longer exclude employees because they were too old unless those employees began work within five years of the normal retirement age for the plan.

With respect to vesting, ERISA allowed plan participants to vest according to one of three rules: full vesting at ten years, the five to fifteen rule (25 percent vesting at five years of service increasing by 5 percent in the following five years and by 10 percent for five more years) and the rule of forty-five (50 percent vesting when the sum of age and years of service equals forty-five, increasing 10 percent per year thereafter). It also required that pension plans’ normal form of benefit be a 50 percent joint and survivor benefit, that is, a pension amount at normal retirement age that has been actuarially reduced to provide a 50 percent benefit to the participant’s spouse in the event of the participant’s death.

With respect to funding, ERISA required that plans fully fund the cost accruing each year and that unfunded past service liabilities be funded over thirty years, with the exception of preexisting past service liabilities, which could be funded over forty years. With respect to fiduciary standards, ERISA required that plans name a fiduciary and that the named fiduciary and any cofiduciaries must act exclusively for the benefit of plan participants. The law required that fiduciaries act as would a prudent person in like capacity. The law also required that fiduciaries diversify assets and prohibited the exchange of property or lending of money between a plan and a party in interest, defined as a fiduciary or the relative of a fiduciary, a person providing services to a plan, an employer, or a related union.

With respect to Keogh plans and IRAs, ERISA raised the tax-deductible amounts that a self-employed person could contribute to $7,500, or 15 percent of earnings if less. It also allowed individuals not otherwise covered by a pension plan to establish an IRA. With respect to limitations on contributions and benefits, it limited contributions to profit-sharing plans such as 401(k)’s to $25,000 or 25 percent of compensation, whichever was less, and limited benefits under pension plans to $75,000 or 100 percent of final average earnings, whichever was less. Both limits were indexed for inflation and were intended to prevent highly paid individuals from taking undue advantage of tax deductions for qualified pension plans. Rules on these amounts have been adjusted with passing years. Employee Retirement Income Security Act (1974) Employment;retirement benefits Retirement benefits

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Beam, Burton T., Jr., and John J. McFadden. Employee Benefits. 6th ed. Chicago: Real Estate Education, 2001. Readable reference guide, useful for all levels. Includes bibliographic references and index.
  • citation-type="booksimple"

    xlink:type="simple">Ghilarducci, Teresa. Labor’s Capital: The Economics and Politics of Private Pensions. Cambridge, Mass.: MIT Press, 1992. The best available analysis of the American pension system and its institutional context. The book is critical of the American employee benefit system and recommends several directions for reform.
  • citation-type="booksimple"

    xlink:type="simple">Ippolito, Richard. Pensions, Economics, and Public Policy. Homewood, Ill.: Dow Jones-Irwin, 1986. A quantitative study of public policy on pensions by an official of the Pension Benefit Guaranty Corporation. Excessive emphasis on some unions’ interest in plan termination insurance as a factor in ERISA’s evolution.
  • citation-type="booksimple"

    xlink:type="simple">Nader, Ralph, and Kate Blackwell. You and Your Pension. New York: Grossman, 1973. Written by the country’s leading consumer advocate and published one year before ERISA was passed. Includes illuminating anecdotes and recommendations for pension reform, many of which were adopted by Congress. The book was surprisingly well received by the pension community.
  • citation-type="booksimple"

    xlink:type="simple">Rosenbloom, Jerry S., ed. The Handbook of Employee Benefits. 6th ed. New York: McGraw-Hill, 2005. Good introduction to practical administrative tasks associated with implementing ERISA and subsequent employee benefit regulation.
  • citation-type="booksimple"

    xlink:type="simple">Wooten, James A. The Employee Retirement Income Security Act of 1974: A Political History. Berkeley: University of California Press, 2004. Definitive history of the act detailing how public officials overcame intense opposition from business and organized labor to pass the legislation. A difficult read, considering the subject matter.

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