Ok so lions and bears are scary, particularly if they are anywhere near you. However, words like ERISA and the PBGC can sound scary when they are used in a letter written in legalese (the official language of the devil) that is supposed to be discussing your retirement benefits. So in this post, I’m just going to take some of the sting out of these monolithic acronyms by explaining a little bit about what they are and what they mean.

First, “ERISA” stands for the Employee Retirement Income Security Act of 1974. Back in the 1970s, it came to the attention of lawmakers that companies weren’t following through on their promises to retirees. Most of the time the issue was that the company went bankrupt or didn’t exist anymore by the time its retirees were supposed to get their share. Another issue ERISA sought to address was some of the more medieval plans that only allowed an employee to retire if he or she had been there for fifteen years or more.

ERISA does many things. I cannot even list them all in 500 words or less so I’ll keep it short. In a very general and basic sense, ERISA binds employers to their promises. Now there are certain rules that ERISA has about the kinds of promises an employer can make and allows for contingencies in the face of unforeseen circumstances. But in a nutshell, ERISA provides a legal avenue to enforce what was promised.

Second, the PBGC or the Pension Benefit Guaranty Corporation is a government entity that deals with pensions. It didn’t come into existence until 2006 when it became apparent that certain auto industry giants were maneuvering around ERISA. If you have heard of the PBGC, it is probably in a letter that states in very scary language that your plan has been taken over by the PBGC because it is currently underfunded. The word underfunded leads completely logical and rational people to panic. However, take a deep breath, if the PBGC is involved it is not necessarily a bad thing.

The PBGC closely monitors the funding of pension plans. Now it must be said that an employer can voluntarily turn over the pension plan to the PBGC even when it’s fully funded. Typically these scenarios end in a lump sum payment to the eligible retirees and a forthcoming lump sum payment to those retirees that will become eligible in time.

If the PBGC terminates or takes over the plan forcefully, it is doing so because it is in the best interest of the workers. The PBGC exists to protect your interests, in as much as any government entity does. Basically the PBGC works as an insurance company for pension plans. If the company or administrator loses too much money, the PBGC freezes the plan so that something will be paid out. It may not be the promised benefit at that point but it prevents that benefit from being nothing or so small it might as well be nothing.

Hopefully this sheds a little light on these scary acronyms and helps you sleep better at night. If not, try a glass of warm milk?  


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    Erin is an Associate Attorney at Fixel Law Offices, you can read more about here on our Staff Page


    December 2012
    October 2012