There is a very concerning law from 1974 known as ERISA. At the time of its passage, most people were not even aware of ERISA. Even today, many people have never even heard of this act passed by Congress and signed into law by President Nixon. The full impact of this law change will not be felt for twenty-five to fifty years after it's passing.
The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93–406, 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18) is a federal law which establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:
* Requiring the disclosure of financial and other information concerning the plan to beneficiaries;
* Establishing standards of conduct for plan fiduciaries;
* Providing for appropriate remedies and access to the federal courts.
ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself. Responsibility for the interpretation and enforcement of ERISA is divided among the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service), and the Pension Benefit Guaranty Corporation.
In 1961, U.S. President John F. Kennedy created the President's Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the Studebaker Corporation, an automobile manufacturer, closed its plant in 1963. Its pension plan was so poorly funded that Studebaker could not afford to provide all employees with their pensions. The company created a program in which 3,600 workers who had reached the retirement age of 60 received full pension benefits, 4,000 workers aged 40–59 who had ten years with Studebaker received lump sum payments valued at roughly 15% of the actuarial value of their pension benefits, and the remaining 2,900 workers received no pensions.
In 1967, Senator Jacob K. Javits proposed legislation that would address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bill was opposed by business groups and labor unions, which sought to retain the flexibility they enjoyed under pre-ERISA law. On September 12, 1972, NBC broadcast Pensions: The Broken Promise, an hour-long television special that showed millions of Americans the consequences of poorly funded pension plans and onerous vesting requirements. In the following years, Congress held a series of public hearings on pension issues and public support for pension reform grew significantly.
ERISA was enacted in 1974 and signed into law by President Gerald Ford on September 2, 1974, Labor Day. In the years since 1974, ERISA has been amended repeatedly.
ERISA does not require employers to establish pension plans. Likewise, as a general rule, it does not require that plans provide a minimum level of benefits. Instead, it regulates the operation of a pension plan once it has been established. Under ERISA, pension plans must provide for vesting of employees' pension benefits after a specified minimum number of years. ERISA requires that the employers who sponsor plans satisfy certain minimum funding requirements. ERISA also regulates the manner in which a pension plan may pay benefits. For example, a defined benefit plan must pay a married participant's pension as a "joint-and-survivor annuity" that provides continuing benefits to the surviving spouse unless both the participant and the spouse waive the survivor coverage.
The Pension Benefit Guaranty Corporation was established by ERISA to provide coverage in the event that a terminated defined benefit pension plan does not have sufficient assets to provide the benefits earned by participants. Later amendments to ERISA require an employer who withdraws from participation in a multiemployer pension plan with insufficient assets to pay all participants' vested benefits to contribute the pro rata share of the plan's unfunded vested benefits liability.
ERISA does not require that an employer provide health insurance to its employees or retirees, but it regulates the operation of a health benefit plan if an employer chooses to establish one. There have been several significant amendments to ERISA concerning health benefit plans:
* The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provides some employees and beneficiaries with the right to continue their coverage under an employer-sponsored group health benefit plan for a limited time after the occurrence of certain events that would otherwise cause termination of such coverage, such as the loss of employment.
* The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits a health benefit plan from refusing to cover an employee's pre-existing medical conditions in some circumstances. It also bars health benefit plans from certain types of discrimination on the basis of health status, genetic information, or disability.
Other relevant amendments to ERISA include the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.
During the 1990s and 2000s, many employers who promised lifetime health coverage to their retirees limited or eliminated those benefits. ERISA does not provide for vesting of health care benefits in the way that employees become vested in their accrued pension benefits. Employees and retirees who were promised lifetime health coverage may be able to enforce those promises by suing the employer for breach of contract, or by challenging the right of the health benefit plan to change its plan documents in order to eliminate those promised benefits.
In January of 2002, the people of the United States, still reeling from the events of September 11, 2001, began hearing of the bankruptcy of one of the biggest blue chip companies in America. But more than the bankruptcy, the news that sent chills through many people of an older generation, the baby-boom generation, the generation born between 1946 and 1964, was the realization
that many of the employees of Enron had lost their entire retirement savings. For the first time, millions of baby boomers began to realize that a 401(k), IRA, and other such plans, filled with mutual funds and company stock, were not as safe as they thought or had been told by their financial planner. Millions of baby boomers shared something in common with the thousands of people who worked for Enron. The demise of Enron was sounding a personal alarm, a fear, a realization that their own retirement might not be as secure as they may have once thought.
One of the intended results of ERISA was to encourage individuals to
save for their own retirement. This would encourage a three-pronged approach to retirement funding:
1. Social Security
2. A worker’s own savings
3. A company pension plan paid out of money the company set aside for a defined pension plan for their employees.
On May 5, 2002, an article in the Washington Post entitled “Pension Changes Pose Challenges” compared this three-pronged approach to a three-legged stool:
Last time we looked, the first leg, Social Security, was still standing, though shuddering a bit as its guarantees are pecked away at—ever-increasing taxable income, a raised retirement age, taxation of some benefits and so forth. . . .
All the lettered and numbered savings plans blessed by Congress—
* Individual Retirement Arrangements (IRAs)
* Roth IRAs
* 401(k) Plans
* 403(b) Plans
* SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
* SEP Plans (Simplified Employee Pension)
* SARSEP Plans (Salary Reduction Simplified Employee Pension)
* Payroll Deduction IRAs
* Profit-Sharing Plans
* Defined Benefit Plans
* Money Purchase Plans
* Employee Stock Ownership Plans (ESOPs)
* Keoghs
Governmental Plans:
* 457 Plans
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* 409A Non-qualified Deferred Compensation Plans
— were arguably intended to bolster the second leg, workers’ savings, needed to meet an ever longer and ever more expensive retirement. The corporate tax benefits attached to the company -sponsored plans—
made up largely of a worker’s own cash—
have been nudged over to bolster or even replace the third leg of the stool. Instead of rewarding thrift in employees, they have enabled companies to ditch or severely curtail traditional pension plans. All of which means: Look, Ma, a three-legged stool with only
two legs!
So as a result of ERISA, people suddenly became responsible for their own retirement planning, transferring it from the employer to the employee— without the financial education needed to help the employee plan successfully. Suddenly there were thousands of quickly trained financial planners educating millions of people to “Invest for the long term, buy and hold, diversify.” Many of these employees still do not realize that their income during retirement is totally dependent on their ability to invest wisely now. If this prophecy comes true . . . for millions of people, but not all people, the problem will only get worse over the next twenty-five years.
Always watch for changes in the law. Every time a law changes, the future changes. If you will prepare to change with the changes in the law you will lead a good life. If you do not pay attention to changes in the law, you may find yourself behaving like the driver of a car who fails to see the sign warning him of a sharp turn in the road up ahead . . . and instead of slowing to prepare to make the turn, reaches over to turn on the radio, fails to make the turn, and drives the car off the road and into the woods.
The Tax Reform Act of 1986 was another change in the law many people did not pay attention to and the price tag for their lack of awareness was measured in the billions of dollars. This 1986 law change was a major contributor to the crash of the savings and loan industry, one of the biggest crashes of the real estate market, and the reason why well-educated professionals such as doctors, lawyers, accountants, and architects cannot use many of the tax law benefits businesspeople enjoy.
For millions of people because of ERISA, this little known change in the law, will negatively affect their financial lives. For others, this law change will be the best thing that ever happened to them. We must see the world today with a true financial perspective. People back then that knew what the effects of this law would create took cues from solid facts, facts such as changes in the law and the flaws in the law. Thay also used statistical realities, realities such as the fact that 75 million baby boomers, 83 million if you count immigrants legal and illegal, are getting older as well, and most will live longer than their parents. They would then ask the question, How many of these baby boomers have enough assets set aside to retire on? Conservative estimates show that less than 40 percent of the baby boomers today have enough.
If the U.S. government must raise taxes to pay for these aging baby boomers’ financial and medical needs in old age, what happens to the U.S. economy? Can it sustain its leadership role in the world? Can we afford to remain competitive if the government raises taxes to pay for the aged and continue to pay for a strong military? When taxes are raised, companies may leave in search of countries with lower taxes. And what happens if China passes the United States as the world’s largest economy? Can we afford to keep wages high when a Chinese worker will do the same job for less?
