The latest lawsuit, this one from Cornell University employees, says that a 403(b) plan is charging too much in fees. They can challenge this because of a law that is enjoying its 50th anniversary this year.
In the case, 28,000 university workers say that their retirement plans charge too many fees for keeping records. A story from Reuters says that the U.S. Supreme Court said earlier this month that it would decide what standards claimants must meet when they accuse a company of these kinds of unfair charges. This is because appeals courts could not agree on one.
The Employee Retirement Income Security Act of 1974, or Erisa, protects employer-sponsored retirement plans like the 401(k) and 403(b). This law set the stage for private-sector workers to get health and retirement benefits. Because of this law’s provisions, Americans have saved $14.5 trillion in private savings and retirement plans, gotten important health and retirement benefits, and been kept safe from financial advice that is tainted by conflicts of interest.
Erisa says that employers must follow rules about who can join a plan and how much money can be put into it. It also says that people who handle retirement assets must be fiduciaries, which means they have to do what’s best for the participant. The Department of Labour says that Erisa also protects the benefits of people who are part of private defined-benefit plans if those plans end. In the U.S. before the law was passed, standards were not the same everywhere, and there were no clear rules for how to manage and protect workers’ retirement savings.
“Employers started to handle benefits for workers, and that system had issues,” said Dan Doonan, head of the National Institute on Retirement Security. “Erisa tried to explain how to make this work for everyone.”
The way Americans save for retirement has changed a lot in the last fifty years. This is because private-sector companies no longer offer pensions, but instead offer defined-contribution plans like the 401(k), which require workers to save for the future. A lot of Americans are also living longer and working longer, sometimes because they don’t have enough money saved to retire.
“Since Erisa was passed, there have been a lot more benefit plans,” said Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee (ERIC), a national nonprofit group. “This is because Erisa is so important and fundamental to giving employers certainty that they need to provide benefits.” There is now a common belief that private retirement savings can help everyone. This belief is a big part of the work force and the relationship between employers and workers.
At the end of the second quarter of 2024, the Investment Company Institute said that Americans had saved $11.3 trillion in defined contribution plans such as 401(k)s. However, Erisa does not protect individual retirement accounts. However, as more people are expected to save for their futures, these accounts have become very important. The Bureau of Labour Statistics says that only about half of American workers put money into a 401(k) plan. This could be because they don’t have access to one or because they think they don’t make enough to pay. IRAs, on the other hand, are open to anyone who makes money. As of the second quarter of 2024, the Investment Company Institute said that these accounts held $14.5 trillion. There was also $3.2 trillion in private pension funds.
However, the differences between IRAs and employer-sponsored plans like 401(k)s show how Erisa can help protect and support financial security. Moving money from a 401(k) plan to an IRA is one example. While IRAs have lower contribution limits than 401(k) plans, employee-sponsored plans are safer from bankruptcies and creditors than IRAs, which only protect up to $1.5 million. This includes money that was moved from a defined-contribution plan to an IRA.
A lot of claims are being filed to protect retirement plans and the money they hold, like the Cornell case. This past year, an American Airlines
People who owned AAL (0.68%) shares sued the company over its investment choices. People also sued Bank of America (BAC -0.10%), Intuit (INTU 0.08%), and Qualcomm (QCOM 4.74%) over retirement plan forfeitures.
While Erisa laid the groundwork for the U.S. retirement system we have now, experts say it still needs to be improved. Many workers, especially those who work for smaller companies, still don’t have access to an employer-sponsored retirement plan. This may be one of the biggest problems. People often use 401(k) plans to save money for retirement, but they are only one part of the story when it comes to getting money in retirement.
The way people save for retirement is always changing. After three years, Secure 2.0 became law. In 2019, a new law called Secure was passed. As Banducci put it, these bills from both parties “meaningfully improved the system.”
When an employee is hired, they are automatically enrolled in a retirement plan. The laws also include tax credits that encourage small businesses to start plans and lower-income employees to contribute. The laws also raise the age at which required minimum distributions must be made and the amount that older workers can save in catch-up contributions.
The National Conference on Public Employee Retirement Systems says that a possible Secure 3.0 law could include a part that requires companies with more than 10 workers to put their workers into an IRA plan. This is similar to what states have been doing for workers at small businesses. The bill could also set up accounts for kids younger than 18 so that family and friends can give them money that they can use for things like buying their first home or retiring.
Doonan said that lawmakers might also want to help retirees spend down the savings they’ve worked hard to build up. “We see the business world trying to keep its strengths and fix its flaws.”
