The Truth about ERISA (Employee Retirement Act) and 401ks

Rich dad, Mike, and I went to one of our favorite Chinese restaurants for lunch. As usual, the place was packed because the food was good, the service fast, and the prices fair. We had to wait a few minutes before a table opened and our favorite waiter cleaned it as we took our seats. As we sat going through the menu, rich dad said to me, “Most people will not have enough money set aside for their retirement. In fact, I would be willing to bet that most of the people sitting in this restaurant will never be able to retire simply because they have nothing in their retirement plans.” “You mean the workers here?” Mike asked. “People like our waiter and those that cook and wash dishes in the back?” “Not only the restaurant workers, but many of the executives in suits and ties who are dining here will have nothing . . . or will not have enough money to retire on. Most of the people in this room will never be able to afford retirement.” “Most?” I asked in surprise. “Wouldn’t it be more accurate to say some rather than most?” “No,” said rich dad. “I believe the more accurate word is most . . . not some.” “How can that be?” I asked. “Most seem to have good jobs. They dress well and appear to be rather intelligent.” “Do you remember me telling you about ERISA?” asked rich dad. “Yes, vaguely,” I replied. “You’ve mentioned it on several occasions. I just have not fully understood what you were saying or why this law change was so important.” “Most people don’t realize its importance,” said rich dad. “It may be years before people begin to wake up to the ripple effects this law change will have in the future.” “What is this law change and why was it passed?” I asked. “Good question,” said rich dad.

“First of all, ERISA stands for Employee Retirement Income Security Act. It was the Act that made 401ks possible. I too did not pay much attention to its passage . . . but soon my accountants and my attorneys began advising me on changes I needed to make in my businesses. Once that began to happen, I began asking more in-depth questions.” “And what did you find out?” I asked. “It seems the act was passed to help protect employees’ retirement money from abuse by their business owners,” said rich dad. “What kind of abuse?” I asked. “There have been many kinds of abuses of retirement plans. Even in some large blue chip companies, pension plans are empty or are underfunded. And many times, a company would buy another company not because of the business, but because they wanted the business’s retirement money. Some of these more responsible businesses had tens of millions of dollars in their employee retirement funds and that pool of money was often more valuable than the business. So the raiding company would buy the business and bleed the employee retirement fund.” “They would take over the company just for the retirement money?” Rich dad nodded his head. “But that was not the only abuse. There were more. It was because of these abuses that ERISA was supposedly passed.” “Why do you say supposedly?” I asked. “Well, the act was passed as a benefit for employees . . . a way to protect employees from these abuses . . . but as we all know, nothing is only good for only one group of people. The company also benefited from the act . . . but the benefits to the company were not really mentioned in the press.” “So how did it benefit the businesses?” I asked.

“Well now that you’ve had your first business, let me ask you this question. How expensive is an employee retirement plan to the company?” “You mean including Social Security payments plus adding money to their retirement plan?” I asked. Rich dad nodded his head, saying, “Yes . . . how expensive is it?” “Very expensive,” I replied. “I often wished I could pay my workers more but the hidden taxes—taxes the employees are often not even aware of— are so high I could not afford to pay much more. Every time I gave them a raise the government also got a raise.” “So while ERISA was passed as a benefit to employees, it was in many ways more of a benefit to the employer. In many cases the expense of retirement has transferred from the employer to the employee.” “But doesn’t the employer have to match the amount the employee puts in?” I asked. “They can if their plan allows it . . . but the key word is match,” said Mike. “In other words, the dollar amount the employer had to pay was now significantly reduced. That is like taking the cost of your mortgage payment and cutting it in half. Wouldn’t you want to reduce your mortgage payment by half?” Mike was very well versed in this new retirement plan because rich dad put him in charge of understanding it. “And on top of that, many employees elect not to contribute anything, so the employer has nothing to match.” “So if the employee does not put any money into his or her fund, the employer pays nothing. The cost of that employee’s retirement just went to zero. And is that why we’re going to have a problem? The problem of people without any retirement savings?” I asked. “That is one of the problems . . . and it’s a very big problem. But in my opinion, it is not the person who has nothing in their retirement plan that will ultimately cause the biggest problem . . . the biggest problem will come from those employees who have diligently put money into their retirement accounts. It is those who have faithfully put money into their retirement plans that will cause the biggest stock market crash in history.” “In history?” I asked skeptically. “And the crash will not be caused by those employees who have nothing . . . it will be caused by those who have set money aside?” Rich dad nodded his head. “Think about it. Can someone with nothing cause the stock market to crash?”

“I don’t really know. I’ve never really thought about it,” I replied. “The biggest stock market crash of all will be caused by millions of people with their money tied up in mutual funds and other types of shares in the stock market, not by those without any shares or money,” Mike added. “It’s just common sense.” “This change in the law will bring about many problems and one of the problems, way off in the future, will be this giant stock market crash,” said rich dad as our food arrived. “Why is that? How can you be so sure?” I asked. “Because the people putting money into the market are not investors. As you already know, most of your workers cannot read a financial statement. So how can you invest if you cannot read a financial statement?” asked rich dad. “The resulting impact started by ERISA is not only leaving millions of people without a retirement plan, it is also forcing people to trust their financial future to the stock market . . . and we all know that all markets go up and all markets go down.” Rich dad looked directly at me. “I’ve been training you and Mike to be investors . . . investors who can make money in an up market and in a down market. But most employees do not have that mental and emotional training . . . and when the big crash begins, I believe they will react as most untrained investors react . . . they will panic and begin selling . . . selling to save their lives . . . selling to protect their future.” “When do you think this will happen?” I asked. “I don’t know,” said rich dad. “No one has a crystal ball with 20/20 vision. But between now and the biggest crash of all, I predict there will be smaller but growing booms and busts in the stock market . . . and these smaller booms and busts will come before the biggest of all booms and biggest of all busts.” “So there will be warning signs?” Mike asked. “Oh yes,” smiled rich dad. “There will be plenty of them. The good news is that you boys will have plenty of time to practice gaining experience and skill through these smaller booms and busts. Just as you two practice surfing on the smaller waves of summer, in preparation for the larger waves of winter, I would recommend you do the same with your investing skills. As the booms and busts get bigger and bigger, you’ll find it easier to become richer and richer.” “But others will become poorer and poorer,” I said quietly. “Unfortunately that is true. But always remember the story of Noah and the Ark. Noah could not get all the animals on board . . . and I am afraid the same is true for the coming stock market crash.”