ERISA, the Younger Generation and Preparing for Retirement
“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.”
-- Jonathan Clements
Forty-one years ago, President Ford signed into law the Employee Retirement Income Security Act (“ERISA”), widely hailed and recognized as the foundation of retirement plan law today. Some wags have joked that ERISA stands for Every Ridiculous Idea Since Adam but, prior to its passage, it was no laughing matter to learn how some retirement plans were being administered. For example, when the Studebaker plant closed in 1963, its pension plan was so poorly funded that thousands of dedicated workers received distributions worth a fraction of the retirement benefits they’d been promised. Thousands more received nothing at all. The demise of Studebaker’s pension plan drew national attention and was the impetus for the passage of ERISA eleven years later.
Some of the new standards ERISA established for private sector retirement plans included:
- how and when a company must provide plan information to employees
- how an employee can enter a plan, become fully vested and receive benefits
- how plan trustees and others must handle plan assets
- how and when a company must contribute to its plan
- how plan assets are protected and handled if a company goes out of business
When ERISA passed, the typical company retirement plan was a pension. With this type of retirement plan, a company sets aside and invests money for employees, bears all of the investment risk and, based on a pre-determined benefit formula, provides monthly checks to retirees throughout retirement. Today, pension plans are scarce and have been replaced with defined contribution plans (e.g. 401(k) plans) where employees contribute their own money, may receive a company match and/or a profit sharing contribution, select their investments and bear all of the investment risk. The funds available at retirement depend on the amount contributed, the performance of the investments and one’s ability to manage a portfolio.
For those not covered by a retirement plan, ERISA let individuals contribute up to $1,500 each year to something new – an Individual Retirement Account (IRA). A few years later, the law was expanded to allow all workers to save up to $2,000 and today, annual contribution limits are higher still.
Although there are many different ways to save for retirement, Americans are doing a poor job doing so, especially young people. The Employee Benefit Research Institute reports that less than half of those between the ages of 25-34 are saving for retirement and a whopping 70% of them have less than $10,000 put away. Many of them may be weighed down in student loan debt, find it difficult to see themselves retired and perhaps figure that they still have plenty of years to save for retirement.
But saving at a young age allows more time for funds to compound. And since determining how much is necessary to save for retirement can be difficult, the American Savings Education Council created the “Ballpark Estimate” (www.choosetosave.org/ballpark) which can help individuals determine approximately how much to save each year so they can retire comfortably someday.
With the introduction of the Roth IRA in 1998, there’s no time like the present for young folks – and all of us – to set aside money for retirement. Unlike Traditional IRA distributions, Roth IRA distributions have the potential to be taken tax-free, which could pay off nicely in retirement.
At September's Chapter Meeting, Mike Brilley, President and Chief Fixed Income Officer of Sit Investment Fixed Income Advisors, will provide an update on the Sit MinnesotaTax-Free Income Fund and the fixed income markets. If you’re unable to attend, contact Steve Benjamin for a copy of Mike’s presentation (firstname.lastname@example.org or 612-359-2554).