Summary: As the life expectancy of Americans continues to increase, the risk that retirees will outlive their assets is a growing challenge. Today, couples both aged 62 have a 47 percent chance that at least one of them will live to their 90th birthday. In addition to the risk of outliving ones' assets, the sharp declines in financial markets and home equity during the last few years and the continued increase in health care costs have intensified workers' concerns about having enough savings and how to best manage those savings in retirement. Congress asked us to examine (1) options retirees have for drawing on financial assets to replace preretirement income and options retirees choose, and (2) how pensions, annuities and other retirement savings vehicles are regulated.
The Employee Retirement Income Security Act of 1974 (ERISA) continues to provide the basic framework for the regulation of private pensions, even as pensions continue to shift from the defined benefit (DB) and the defined contribution (DC) plans. ERISA and its regulations specify, among other requirements, the duties of a plan fiduciary; the type of plan transactions that are prohibited; and the required disclosure of plan features to plan participants. However, once an individual withdraws his or her funds from either a DB or DC plan for retirement, a multiplicity of laws and regulations typically take precedence, depending on the investment decisions that the individual makes with those funds. Under ERISA there is a comprehensive regulatory scheme which provides certain protections for privately sponsored employee pension benefit plans and their participants and beneficiaries. Several federal agencies are charged with enforcing these protections. The Department of Labor's Employee Benefits Security Administration (EBSA), within the Department of Labor, enforces ERISA Title I requirements, which include minimum plan standards for participation; vesting and accrual of benefits; and fiduciary responsibility requirements respecting the exercise of any discretion, control, or management of the plan or its assets. Under Title II of ERISA, which addresses the tax qualified status of pension plans, the IRS ensures that these plans maintain their qualified status under the Code. The Pension Benefit Guaranty Corporation (PBGC), under Title IV of ERISA, provides plan termination insurance for defined benefit pension plans which terminate with insufficient assets to pay promised benefits under the plan. Individuals who have left the regulated environment of ERISA-covered plans and now seek to secure their retirement savings in the commercial and retail market face a myriad of decisions and investment or insurance products in which to invest their retirement savings. While ERISA regulations address the potential for conflicted advice, the environment in the retail market is quite different. Once an individual withdraws his or her funds from either a DB or DC plan, a multiplicity of laws and regulations typically takes precedence, depending on the investment decisions that the individual makes with those funds. In this instance, the individual is no longer a plan participant governed by ERISA, but is now essentially a retail investor governed by the laws and regulations that are pertinent to the particular product or asset in which they choose to invest whether or not the funds are in an IRA. The different laws, regulations, and agencies that may come into play vary depending on the type of assets held.
