Despite all the hoops that the Trump administration has made the Department of Labor jump through regarding the fiduciary rule, the law is FINALLY set to go into effect on June 9th, with implementation occurring over the next 6 months. What does that mean for you? Basically, it's now illegal for financial advisors to knowingly screw you over.
Revolutionary legislation, I know, but it's true. Those who dealt with the sales of stocks and securities could legally act within their own best interests without any disclosure to you and if you ever sued them, it wouldn't matter because the law never mandated that financial advisors act as fiduciaries and make decisions with the best interests of the client in mind.
For this edition of Macro Mondays, I want to walk you through the main piece of legislation that got us to this point: ERISA laws. These essentially laid the framework for the fiduciary rule, and if you are an individual with an employer sponsored 401(k) plan, you need to know about your rights when it comes to your money. To learn more, be sure to check out the rest of the details on Investopedia's page.
What is the 'Employee Retirement Income Security Act - ERISA'
The Employee Retirement Income Security Act of 1974 (ERISA) protects the retirement assets of Americans by implementing rules that qualified plans must follow to ensure plan fiduciaries do not misuse plan assets. Under ERISA, plans must provide participants with information about plan features and funding, and furnish information regularly and free of charge. ERISA also sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits and to have a nonforfeitable right to those benefits. It also establishes detailed funding rules that require plan sponsors to provide adequate funding for the plan.
How Did 'ERISA' get Started?
This set of laws was enacted to address irregularities in the administration of certain large pension plans. In particular, the Teamsters Pension Fund, which had a rather colorful history involving questionable loans to Las Vegas casinos, brought the issue of fiduciary malfeasance related to retirement accounts to the public eye. ERISA was partially created in response to those issues.
How Does 'ERISA' Deal with Accountability and Participant Protection?
ERISA requires accountability of plan fiduciaries, and generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan. ERISA also addresses fiduciary provisions and bans the misuse of assets through these provisions.
In addition to insisting participants are informed, ERISA also gives participants the right to sue for benefits and breaches of fiduciary duty. To ensure participants do not lose their retirement contributions if a defined plan is terminated, ERISA guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation.
Are there Some Retirement Plans That are Not Governed by 'ERISA'?
Not every retirement plan is subject to the terms of ERISA. In particular, ERISA does not cover retirement plans set up and maintained by government entities and churches. Similarly, if a company sets up a plan outside of the United States for its nonresident alien employees, ERISA does not govern that plan.
The complicated rules of ERISA deter some small business owners from setting up retirement accounts for their employees. To allow these companies to sidestep the confusing regulations, there are alternatives. For example, a Simplified Employee Pension (SEP) plan is basically an individual retirement account (IRA) set up by an employer so it can contribute to its employees' retirement savings efforts; SEPs are often not subject to ERISA regulations.
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