The History of the Employee Retirement Income Savings Act (ERISA)
December 03, 2018
The Early Days of Pension Plans
Private pension plans had been around in various forms since the early 1890s, but first real regulation of pension plans came with the Revenue Acts of 1921, 1926, and 1928, which included three major provisions that helped define retirement plans as we know them today. These acts allowed corporations to deduct contributions made to pension plans from their reported income, and allowed pension funds to accumulate income tax-free, and deferred taxes on the participants until the pension was distributed. These benefits were accompanied by discrimination testing and financial audit requirements.
One of catalysts that led to the enactment of ERISA was the closure of the Studebaker-Packard Corporation car manufacturing plant in South Bend, IN in 1963. The pension had promised generous benefits for the participants, but the plan was severely underfunded and wasn’t able to cover the benefits for many of the employees vested in the plan. The failure of the Studebaker pension plan, along with a high profile conviction of infamous Teamsters boss James Hoffa on pension fraud, drew a lot of attention to pension plan corruption and mismanagement and spurred talk of reform and regulation in Washington, DC.
The Introduction of ERISA
It took ten years for ERISA to come to fruition after the Studebaker pension failure. Senator Vance Hartke of Indiana (not coincidentally the state where the Studebaker plant was located) was the first to propose new legislation in 1965 that would provide for pension insurance and create the Pension Benefit Guaranty Corporation (PBGC) to collect the premiums from insured pension plans. The PBGC would pay out if a pension plan were to close and not have the funding to cover the amount owed to participants in the plan. Senator Jacob Javits was the architect of the main ERISA law, as he sponsored a number of different laws in the late 1960s that would later become key components of the final version of ERISA, with regulations touching on participation, vesting, funding, reporting, and disclosure rules for private pension plans.
Companies and labor unions both fought the passage of new regulations for pension plans, uneager to take on the challenge of more closely monitoring their pension offerings. Faced with the prospect of states enacting different sets of pension regulations that would have proved difficult for many companies who operated in multiple states to navigate, businesses warmed to the idea of national pension regulations. ERISA was passed by both houses of Congress by March 1974 and was ultimately signed into law in September 1974 by Gerald Ford.
“Who’s Who” and “What’s What”
The act gave regulating power to three agencies: the IRS, the PBGC and what is now known as the Employee Benefit Security Administration, or EBSA. As of the 2016 filing year, ERISA covers over 700,000 retirement plans and over 50 million active plan participants.
The Form 5500 was created by these three agencies to collect the disclosure information required by ERISA, and is the source of the vast majority of the data you’ll get from Judy Diamond Associates’ prospecting tools.