Retirement

Retire No Longer

In 1974 the US Congress passed the Employee Retirement Income Security Act (ERISA).  This legislation came after several employers failed with no funding for promised pensions, employees were left with nothing.  The legislation created massive regulation through the IRC and Department of Labor including rules around funding, provided government insurance (funded by the employers sponsoring pension plans), and required many new plan provisions and increased disclosure and communications among other numerous requirements.  ERISA made it more complicated and far more expensive to sponsor a pension plan. Taken together all these requirements had (as usual) unintended consequences; the traditional defined benefit pension began to disappear.  Today, only government workers can count on a pension for life, but then again taxpayers are footing that bill (that’s another story altogether). 

To cut costs and continue the guise of employees having a pension many employers converted their plans to cash balance plans, technically a defined benefit pension, but one that typically accumulates lower benefits and is paid in a lump sum, an option that most people like but are unprepared to handle. The party line for cash balance plans was that employees could see the accumulating value in a lump sum and that they were portable. After all nobody was going to work for a company for their entire working career any longer.  Of course, all the rules, costs and complexity of ERISA still apply to the cash balance plan. 

In the mid 1980s the 401(k) plan came on the scene, first as a supplement to the regular pension and then as now the sole retirement vehicle provided by employers who provided any retirement plan.  The 401(k) depends on the employee’s participation, investing acumen and ability to prudently use the funds during retirement so they last a third of ones lifetime…good luck with that. 

Now, to cope with the poor economy, the 401(k) plan is an easy target.  Rather than go through the gyrations of messing with a pension plan to make changes, an employer merely stops the company match on the 401(k) plan and again the future of retirement income is in jeopardy.  It appears that the words commitment, obligation, integrity are not in the corporate lexicon these days (yes, I believe they once were).   

The future ability for anyone to retire is vanishing, the implications on the workforce of the future are monumental, by shifting this burden back to the worker we are inviting more and more government intervention and more taxes to support more entitlements, interestingly at a time when the existing government retirement (think Social Security) income program has growing financial distress.  But wait, America did vote for change, here is one promise the politicians are going to keep. 

Does anyone think long term or with an eye toward unintended consequences?   Ah, but after all the business of business is business is it not?

Categories: Retirement

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