Have you embraced becoming your own pension manager?
When I was 13 years old, then President Gerald Ford celebrated Labor Day by signing ERISA into law. ERISA is the Employee Retirement Income Security Act (pronounced a-ris-a). And it is one of the most sweeping and influential laws that affects every worker in the country. This year ERISA turns 50! And you’ve either embraced the rules for retirement allowed by ERISA and have become a self-made millionaire. Or, you’ll find out you don’t have enough for the retirement you dreamed of.
Why did workers need ERISA?
Before 1974, American workers got a paycheck. Many companies also offered pension plans. If an employee worked for a company for enough years, they could receive the pension. But there was a catch. Hidden rules made it nearly impossible for most workers to know how much they would receive. And the rules could change overnight.
A worker could have been eligible for a pension after 25 years of work at the company. But as that date loomed close, the rules could change to require 30 years for a pension. Or the worker might have been laid off after 24 and a half years on the job. And there would be no pension.
Not to mention spouses of workers. Many of the industrial jobs in the first half of the 1900s were dangerous. Men often became disabled or died, leaving a wife and children with no means of support.
Decades of bad behavior and mishandling of pension money was cause for Congress to take action. They worked on a bill to make private pensions more transparent to workers. And to hold employers and sponsors of these retirement plans accountable.
Words of wisdom from the President
Today, with great pleasure, I am signing into law a landmark measure that may finally give the American worker solid protection in his pension plan.”
“Under this law, which is entitled the Employee Retirement Income Security Act of 1974, the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed. Employees will also be given greater tax incentives to provide for their own retirement if a company plan is unavailable.”
With those words on September 2, 1974, President Gerald R. Ford signed the Employee Retirement Income Security Act (ERISA) into law. Today, ERISA is 50 and more important than ever imagined.
The landmark law called ERISA
ERISA is a federal law that sets minimum standards for most retirement and health plans in private industry. It doesn’t sound all that intimidating on first blush. Minimum standards. How hard can they be to implement?
Well, ERISA is a massive law. It literally governs every move employers can make with your retirement plan. Whether it is a traditional pension plan, a 401(k), or certain 403(b)s. A few examples of the sweeping nature of ERISA for employers:
- Requires employers to provide participants with timely and detailed information about plan features and funding.
- Sets the rules for participation, and requires testing to ensure lower income workers are participating…not just high earners.
- Limits the time before a participant becomes vested, generally 3 or 5 years.
- Lays out when contributions must be allocated to each participant’s account, usually during the payroll cycle or within a few days.
- Requires the employer to be a fiduciary and the responsible party for managing those who recommend investments and control plan assets.
- Allows participants to sue for benefits and breaches of fiduciary duty.
- And on and on.
And there’s more…
IRAs were also created under ERISA. The law lays out every rule that governs your IRAs. Both traditional IRAs and Roth IRAs. For example:
- Who is allowed to fund an IRA. (You may remember at-home moms were not allowed to fund an IRA in the beginning. Then they could only contribute a small amount vs. their working husbands.)
- Exactly when an individual can contribute to their IRA—prior year funding vs. current year funding deadlines.
- When individuals can take money out of their IRA and when they will be penalized with higher taxes for tapping too early.
- How and when an individual can roll over a 401(k) to an IRA.
- If and when traditional IRA dollars can be converted to a Roth IRA. And when you must pay taxes.
- Required Minimum Distributions must begin in your 70s and taxes are due.
- And many, many more rules.
And don’t think small businesses were overlooked. ERISA spells out every rule and regulation for plans such as SEP-IRAs, SIMPLE-IRAs, solo 401(k)s. And still governs the old Keogh money purchase and profit sharing plans, and long-gone SarSeps.
ERISA is 50 now and stronger than ever. It provides protections for individuals who are counting on retirement savings to be there when they retire
Sweeping legislation changes your course of retirement
ERISA also lays out in excruciating detail exactly what each individual can and cannot do in retirement plans and IRAs. Much of the rule setting has to do with taxation of these accounts. And naming beneficiaries.
To encourage saving for retirement, these accounts are tax-favorable. Savers might get a current year tax deduction for making an IRA contribution. Workers saving in a 401(k) or 403(b) can reduce their taxable income when diverting some paycheck dollars into the plan.
The Roth IRA or Roth 401(k)/403(b) works differently. Rather than getting a break on current year taxes, individuals save with after-tax dollars. Later, after meeting specific rules, they can withdraw Roth dollars and earnings income-tax free.
But the decision whether to contribute to a retirement plan or an IRA falls squarely on every worker’s shoulders. The amount they’ll set aside for retirement is their own decision. How they’ll invest—and how much risk to take on—is up to each individual. Knowing all the rules and regulations and taking action when they apply is each person’s individual responsibility.
Did you sign up for all this responsibility?
Probably not. I’ve talked thousands of wonderful folks over the past three decades. Most are quite excited about their retirement. They are equally clueless if they’ve saved enough to cover 30 years of retirement spending. And they sure don’t know the rules that govern how and when they can take money out of their retirement plans.
In short, with the passage of ERISA back in 1974, every worker became their own pension manager. And actuary. Not to mention investment expert and CPA. Economist and market forecaster. Risk assessor and gambler. And they must act like a small business owner generating revenue for some 30 years in retirement.
That ERISA is 50 and has been around for five decades has done little to prepare real people for real retirement income. Most folks have no formal or informal education about all the required pieces of being a successful investor for retirement.
Even the best financial advisor professionals are ill-equipped to deal with the retirement income side of the mountain. Most have built their expertise on the accumulation side of retirement. They’ve successfully helped many clients save adequately for retirement. But managing income for retirement spending is not well supported.
ERISA is 50 this year. Are you a millionaire yet?
For baby boomers at the end of their careers, they’ve had decades to figure out the ERISA rules. But most haven’t. They were simply too busy juggling the many demands on their limited time and income. A mortgage. Insurance and tax obligations. Groceries and gas. Not to mention those expensive kids.
About half have saved toward retirement, but generally without any kind of roadmap. And now that they need to create income, they find they don’t have enough. If you’ve managed to save and invest really well you may well be a millionaire.
But safely managing the distribution side has very few fiduciaries looking out for you. You are on your own to figure out the rules for distributions. It’s up to you to properly and timely pay your income tax obligations. And you need to make sure you don’t run out of money.
Sure, ERISA is 50 this year, but most individuals are not well-prepared to create income for the next 50 years.
For more information on ERISA and planning for your retirement income…
…you may find these resources helpful:
Cooking Up Your Retirement Plan. This workbook and discussion guide puts some fun into planning for your retirement. It covers what you want to do with all your new-found free time. And how to use what you have to pay for living decades in retirement.
Summary of ERISA. Believe it or not, Wikipedia has a really good run down of the law.
History of EBSA and ERISA. This is a good summary of ERISA and how the enforcement arm protects individual accounts.
