We have previously shown that the C-terminal sequence HDEL acts as a retention signal for luminal endoplasmic reticulum (ER) proteins in Saccharomyces cerevisiae, and that it is possible to isolate mutants that fail to retain an invertase fusion protein bearing this signal. Analysis of many such mutants defines two genes, ERD1 and ERD2. Cells lacking the ERD1 gene secrete the endogenous ER protein, BiP. Under normal growth conditions, the rate of secretion is equivalent to the rate at which wild-type cells secrete a modified form of BiP that lacks the HDEL signal altogether. Thus, erd1 cells show a profound disruption of the retention system. The mutant cells have no gross abnormality of their intracellular membrane system, but show defects in the Golgi-dependent modification of glycoproteins. We suggest that sorting of luminal ER proteins normally occurs in the Golgi, and that the function of ERD1 is required for the correct interaction of an HDEL receptor with its ligands. The sequence of ERD1 predicts a membrane protein with several transmembrane domains, a conclusion supported by analysis of ERD1-SUC2 fusion proteins.