Not so long ago, for an employee who showed up to work every day, retirement meant a lifetime pension and a gold watch. Before that, workers who outlived their usefulness on the job moved in with the kids to be cared for until the end—which probably came much sooner than it would today.
Both of those chapters are in the history books, replaced by today’s environment where people change jobs as often as Granddaddy changed his socks. Not only is a company pension a thing of the past, employees must take charge of their own financial futures, creating their own retirement. Add to that the fact that retirement could last 20 or 30 years after retirement, and it’s easy to see that responsibilities have shifted and challenges increased.
For companies, too, times have changed. Employers today are faced with a bewildering array of regulations that present challenges to even the most savvy. Penalties for mishandling the retirement plan can be severe, in terms of employee relations and finances. There is even the threat of personal financial responsibility and jail time for particularly grievous offenses.
While the demands of successfully running a retirement plan are substantial, they are not insurmountable. As we think about how to use today’s technologies and processes to make our plans successful, it can be enlightening (and possibly entertaining) to remind ourselves of where we’ve been.
Here’s a brief history of the qualified retirement plan system in America:
The 1970s: To protect employees against the dangers of unfunded pension promises, like the ones realized by employees at Studebaker, Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA). The Act requires (among other things) employers to set aside enough money to back up the pension promises they make. In 1978, the Internal Revenue Code was amended to add Section 401(k), allowing employees to set aside some of their pay for their own future benefit, and to avoid current income taxes on that portion.
The 1980s: Section 401(k) becomes law in 1980, and the largest companies jump on board. Within three years, nearly half of all large firms have a 401(k) plan. But, Congress realizes that the highest paid employees are benefiting disproportionally from the plans, so in 1984, they pass the Tax Reform Act with its non-discrimination provisions. This was followed in 1986 by another Tax Reform Act, limiting the amounts participants could defer.
The 1990s: New rules about plan distributions and rollovers were implemented in 1992 with the Unemployment Compensation Amendments. 1996 saw the Small Business Job Protection Act, which provided for safe harbors that allowed more saving as long as contribution and vesting rules were met. As the decline in pension plans continued, and it became apparent that some employees would not enroll in a 401(k) plan on their own, the law began in 1998 to allow auto-enrollment for newly eligible employees.
The 2000s: In 2000, auto-enrollment was expanded to include existing employees, and in 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was enacted, allowing higher deferral limits, catch-up contributions, faster vesting, and easier rollovers. 2006’s Pension Protection Act made EGTRRA’s higher limits permanent, and encouraged auto-enrollment.
The 2010s, so far: Recognizing the need for all parties to know how much is being paid for services to 401(k) plans, ERISA Sections 408(b)2 and 404a5 were created. These require notifications to plan sponsors and plan participants informing them about how much they are paying.
Consider, too, that when Section 401(k) was added to the law, contributions and investment earnings were likely tracked on green accounting pads or, at best, in a rudimentary, self-created spreadsheet housed on a Compaq DeskPro in the computer room at the office. In just over 40 years, the regulatory and technological pictures have changed substantially.
How does all of this impact plan sponsors today? We’ll explore that question, and take a look ahead at some best practices, in future posts.
In the meantime, if you are not sure if you are meeting your regulatory responsibilities, we are here to help.