On August 3, 2020, by a vote of 93 to 5, the US Senate passed the “Pension Protection Act of 2006″, already approved by the House of Representatives on July 28, 2020 and now going to President Bush to be signed into law.

This massive bill (907 pages) is a major piece of legislation that, like ERISA in the 1970s, will effect capital flows in the US market over the next generation.

Links to the full text of this law and related discussions can be found on BenefitsBlog.

A Boon For Wall Street?

The Wall Street Journal has already headlined some of the expected effects on capital flows.

In the lead editorial on August 4, 2020, “The Pension Era, R.I.P.”, the Journal announced that this law “signals the end of the old, defined-benefit pension era.”

In an article on August 7, 2020, the WSJ announced, “Pension Bill Promises Windfall for Fund Firms”, citing research by the Vanguard Group projecting an additional 5.5 million new savers in 401(k) plans.

The article also states that passage of the bill was helped along by heavy lobbying by the mutual fund industry trade organization, the Investment Company Institute. The Act allows, but does not require, automatic enrollment in 401(k) plans and permits employers to give “investment advice” to plan participants.

The Law of Unintended Consequences

History suggests that a law as complex as the Pension Protection Act of 2006 is likely to be laced with obscure provisions that will have unintended consequences.

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Despite tax benefits and a generation of strenuous marketing efforts, over half of U.S. households do not have Individual Retirement Accounts (IRAs).

In fact, 29% of U.S. households have neither IRAs or employer-sponsored retirement plans. This is according to the Investment Company Institute’s “Research Fundamentals”, issued in January 2006.

This 12-page report was available in PDF format, without charge, on the Investment Company Institute website in March 2006..

IRA Report
IRA Report

The ICI report indicates that IRAs owners are typically middle-aged, married, college educated, and employed — and with much higher incomes than people that don’t have IRA savings.

The study also indicates that Americans between 50 and 64 years without formal retirement savings have median total financial assets of only $2,500.

In twenty years, the U.S. may face a situation in which for every unionized public employee, with a generous ‘defined benefits’ retirement plan, there will be another older American, not so fortunate, living in poverty.

(See: “Why ‘Defined Benefits’ Pension Managers Support Stock Buybacks“.)

The inability of American political leaders to engage in constructive, honest dialogue to resolve retirement issues will have unpleasant consequences.

Until then, it is, as the Brazilians say, “Salve-se quem puder!”


American households, as of December 2004, had accumulated $3,475.1 billion in tax-deferred Individual Retirement Accounts (IRAs), according to the Federal Reserve Flow of Funds Accounts.

The largest portion of these savings were held as “self-directed accounts”, in which a wide diversity of investment are permissible (according to Equity Trust Company), such as:

  • Real Estate (apartments, single-family homes, and duplexes);
  • Commercial property, developed or undeveloped land;
  • Mortgages or Deeds of Trust;
  • Publicly traded stocks, bonds, and mutual funds;
  • Private limited partnerships;
  • Private stock offerings, private placements;
  • Private limited liability companies;
  • Secured and unsecured notes;
  • Judgments, Structured Settlements;
  • Tax Sale Certificates;
  • Car Paper;
  • Factoring;
  • Accounts Receivable;
  • Commercial Paper; and
  • Equipment Leasing.

The graph shows the distribution of individual retirement accounts, by type of custodian:

Growth of IRA Accounts
Growth of IRA Accounts

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