ERISA has been in existence for almost 40 years, but many people don’t know what it is or why it is an important part of retirement planning. The Employee Retirement Income Security Act of 1974 protects the funds that millions of Americans pay into retirement plans every year, to make sure that money is available when they retire. ERISA is administered by the Employee Benefits Security Administration (EBSA), which falls under the Department of Labor.
ERISA’s primary function is to establish minimum standards for retirement, health, and other benefit plans, such as life and disability insurance. These protections apply only to private employers (non-government) that offer employer-sponsored retirement, health, and other benefit plans to their employees. It’s important to note that ERISA doesn’t require employers to establish benefit plans – it simply sets rules for those plans that employers choose to offer.
ERISA and retirement plans
ERISA helps make sure that...
As a plan sponsor, you will probably end up answering this question often, whether talking to new hires or long-term employees who haven’t taken advantage of your retirement plan yet. Simply put, the answer is that if individuals don’t plan for their retirements, no one else will take care of it for them.
Traditional retirement income sources are changing
Traditionally, Social Security formed a large chunk of many people’s retirement income. However, it was never intended to completely fund retirement, but was designed to provide a bare minimum of retirement funding. It’s even less able to do so now, with rising costs and other economic and demographic changes. Social Security is funded by people who are currently working. As our population ages and people live longer, there are more and more beneficiaries receiving funds from Social Security, and less and less employed people putting money in. A number of proposals have...
An employer-sponsored retirement plan like a 401(k) is an important, and growing, part of most people’s retirement strategy. However, 401(k) plans can differ significantly, and some of those differences can seriously affect your plan participants’ retirement prospects.
401(k) plans are not pensions, and there is no guaranteed payout. Their values fluctuate with the financial markets, and participants need to understand that. But there are also other, less obvious, aspects of 401(k) plans that can impact their performance, and plan sponsors should be aware of them. Some of these include:
Review your fees. As a plan sponsor, you are now required to disclose fees and expenses charged to your plan participants. As part of your due diligence process, you should review the fees of all the investments in your plan and make sure they are appropriate. This will also help you prepare for questions from your participants after they review the fees....
For the most part, people make sensible decisions about their money. They choose actions that improve their lives or increase their net worth. Sometimes, though, people don’t make rational financial choices. They make decisions that are arbitrary and unpredictable. Behavioral finance seeks to explain those choices, by combining economic and financial principles with psychological theory.
Conventional economics assumes that people are “wealth maximizers” and make decisions that increase their well-being. But the world is a messy place, and sometimes emotions and other factors influence monetary decisions. Behavioral finance has identified a number of irrational behaviors that affect financial decisions, including:
Anchoring. Anchoring comes into play when a person stubbornly clings to a fact or figure that shouldn’t affect their decisions. A common example is “The stock market is too risky.”
Mental accounting. This term refers to people separating their money into different mental “accounts” and then treating it differently. For example,...
As a plan sponsor, you want to help your participants plan a comfortable retirement. Obviously, planning your retirement while you’re working is a big part of successfully retiring. Another critical part, though, is what you do after you retire. At that point, when you’re no longer working, it’s much harder to recover from mistakes. Here are some mistakes that your participants should avoid after they’ve retired:
No financial plan. Retirees run into problems when they don’t have a budget before retiring. Failure to set a budget leaves you very vulnerable to unpleasant surprises. You should also update your financial plan over time and as your circumstances change.
Claiming Social Security too early. Waiting as long as possible to collect Social Security is one of the best moves a retiree can make, but many start collecting as early as possible, thinking they’ll get the “most” money that way. Delaying benefits can increase...
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