Mention a Packard or Studebaker to classic car buffs and eyes glisten.
These sleek wheels were once the epitome of luxury. In 1954, the two companies merged, but the new company lost its traction and US production came to a screeching halt in 1963. When the company went kaput, thousands of the company’s workers discovered that their traditional defined benefit pensions guaranteeing an income stream for life were terminated too.
The outrage caught the attention of lawmakers, and although it took more than a decade, federal legislation to protect workers’ retirement savings was signed into law in 1974: the Employee Retirement Income Security Act, or ERISA.
That law is the spine of much of today’s retirement benefit landscape for American workers, but it’s having a midlife crisis.
The gist of it: ERISA was created to protect workers by overseeing retirement accounts like traditional pension plans and, eventually, 401(k) and most 403(b) plans, but it only safeguards some of us.
In a special episode of Decoding Retirement, I sat down with Robert Powell, a retirement expert and host of the podcast; and Molly Moorhead, Yahoo Finance’s personal finance editor, to discuss how American workers are faring under ERISA.
Read more: Retirement planning: A step-by-step guide
ERISA fortified retirement savings to a more stable system, ensuring that plan participants receive their benefits and that the Studebaker-Packard pension collapse doesn’t happen again.
The law imposes funding requirements for companies, rules for employee eligibility, and fiduciary standards requiring employer plan sponsors to act solely in the interest of participants. It does not, however, require any employer to establish a retirement plan.
The law also shortened eligibility and vesting periods.
“ERISA’s accelerated vesting rules have made retirement benefits more portable, accommodating today’s mobile workforce,” Powell said. “And reporting and disclosure requirements under ERISA have significantly reduced retirement plan fees, improving value for participants.”
Importantly, the law established the Pension Benefit Guaranty Corporation, a federally sponsored insurance fund that safeguards workers when pension plans go up in smoke.
“In essence, it’s an insurance company that says if your employer’s pension plan goes belly up, there is at least an insurance company there that will pay you some percent of what your scheduled benefits were,” Powell said.
ERISA also protects 401(k) and many 403(b) plans since they’re employer-sponsored retirement accounts.
