Employee Retirement Income Security Act

The Employee Retirement Income Security Act (ERISA, 1974) imposed requirements, on covered employers, to manage employee pension funds for the benefit of their workers. For years many U.S. employers engaged in a variety of practices such as arbitrary termination in pensionplan participation, arbitrary benefit reductions, and mismanagement of pension-fund ASSETS. ERISA was passed to address many of these abuses. The act does not require an employer to establish or fund a pension plan but does impose FIDUCIARY DUTIES for fund managers. Three important rules within ERISA include the “prudent man” rule, which stipulates that employee pension funds cannot be invested in FINANCIAL INSTRUMENTS that prudent trustees of other pension funds would not purchase. This was intended to reduce the risks taken by pension-fund managers with employees’ retirement funds. Under the prudent man rule, most fund managers diversify investments as way to reduce risk. The second rule requires ERISA fund managers to be registered brokers with the SECURITIES AND EXCHANGE COMMISSION (SEC). This often prevents fund managers from investing in FUTURES markets, because futures-market managers are regulated by the COMMODITY FUTURES TRADING COMMISSION, not by the SEC. Third, ERISA only applies to pension funds for privatesector employees, not public pension funds. While many states have adopted ERISA guidelines, state employees’ pension funds have often been “tapped” to purchase risky investment decisions. In one of the more famous cases, New York City employee pension funds were loaned to the city to prevent the city from filing for bankruptcy. If the prudent man rule had applied to the New York City pension fund managers, it is unlikely that they would have made that investment decision. The DEPARTMENT OF LABOR (DOL) is charged with enforcing ERISA. Most companies hire professional fund managers to oversee investment of pension funds, but the DOL has ruled that corporate directors and officers are still liable for prudent management of their employees’ retirement funds. ERISA requires record-keeping, reporting, and disclosure requirements on companies, as well as requirements guaranteeing employee participation and vesting in pension plans.