DigitalPiggyBank

Recently the Labor Department posted a draft of proposed revisions to the Employee Retirement Income Security Act (ERISA).  The purpose of the revision is to ensure that any finance professional who solicits or administers your Retirement Plan must act in a ‘Fiduciary’ capacity, disclosing in the contract how they are compensated- And notifying you of any Conflicts of Interest they have in administering your IRA (or Qualified Plan).

This is a much-needed change.  Look at the DOL’s graph of retirement assets by plan type (IRA, 401k, or Pension) over the past 30 years:

RetirementGraph-1v6

The ‘Tipping Point’ was twenty-some years ago, somewhere between 1990 and 1997.  During this span, two key events took place:

  • Traditional Pensions (Defined Benefit Plans) fell out of First Place, replaced by 401k’s (Defined Contribution Plans).
  • The IRA went from Last Place to First Place (in total Assets held).

The fact that IRA assets are now more than DOUBLE the assets in Traditional Pensions should give us pause.  Your grandfather’s retirement plan included a Gold Watch and a guaranteed Defined-Benefit Pension (payout) after 30 years’ employment with IBM.   All of the responsibility (and liability) to administer the retirement plan (pension) was on the employer.

Flash forward to today.

Your retirement plan is more ‘every man for himself’.  The advantage is that you have more control- You can choose your own investments (within retirement plan offerings) and take your retirement plan balance with you if you decide to change employers.  The disadvantage is that you’re on your own to figure out your best asset allocation based on your life’s needs, plus shop for plans with the best offering of choices and expenses .  This is not necessarily a horrible thing, but it takes some discipline, time, and effort on your part to ‘Captain your own Retirement Ship’.

The new proposed ERISA (Fiduciary) Regulation solves a key problem in this New World Retirement Order – Before the new ERISA regulations, Investors could be fleeced out of a decent 401k plan and into an IRA that provides low returns to the Investor and high returns to the Broker/Dealer.  This was highlighted in the press a few months ago as many media outlets (rightly) revealed the ugly TSP Rollover Scam affecting TSP participants and retirees.

At least now the Retirement Plan (IRA or Solo 401k) Broker/Administrator must disclose this fact when they solicit your Rollover business.  The Department of Labor in its ERISA press release calculated that hidden or undisclosed IRA fees cost retirees $17 billion per year collectively, and these undisclosed fees could shrink the value of a retirement portfolio by as much as 25% during the accumulation phase (working years) of the individual.

Going to make a bold statement here-  This could be the most effective and long-lasting contribution by our 44th President (The Affordable Care Act had lofty goals but failed to attack the root cause of spiraling healthcare costs – the lack of transparency).

The ERISA rules were written in 1975, when your grandfather’s Defined Benefit Pension Plan was the standard for retirement.   Today’s retirement plan landscape has largely shifted the burden of saving for retirement over to the individual-  Therefore, ERISA is overdue for an update to reflect and support this.

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