Advisor Today Guest Column

January of 2025 is the 50th anniversary to one of the most important pieces of legislation in the retirement planning arena ever put into law by Congress. What I’m referring to is the enactment of ERISA, the Employee Retirement Income Security Act. Without question, ERISA brought about significant changes during the second half of the twentieth century. The key component to ERISA, which became law on January 1, 1975, was the establishment of the Individual Retirement Account or IRA. And what a monumental impact IRAs have had on the retirement planning market from that day forward. According to recent data, approximately 55 million Americans (representing around 42% of all households) hold IRAs with the average balance being around $195,000 per taxpayer.

I know a good deal about the IRA because January 1975 also represents the month I joined my Dad’s firm, which then was primarily a life insurance practice. With my being new in the business, Dad and I traveled to Atlanta in January of 1975 for an introductory meeting on IRAs and how we might successfully market this new product.

When they were first introduced, some referred to the IRA as “the man-on-the-street pension plan” because prior to 1975, the only eligible participants for pension plans were those who worked for sponsoring businesses or corporations. And, frankly, many of the pension programs in place before 1975 were defined benefit plans usually funded by an employer.

But beginning in 1975, anyone who generated earned income could set up their own person pension plan (or IRA) just like those in a company-sponsored program. The impact of this law started a tsunami of change in the retirement-planning business.

At the start, the maximum contribution a participant could make was 15% of earned income up to a yearly maximum of $1,500. The real “sizzle” to the IRA was for the first time ever, the self employed (and eligible small companies) could create their own pension accounts and deduct what they contributed from their taxable incomes each year. Plus, the annual growth of assets in the program would accumulate on a tax deferred basis.

A little over twenty years later in 1998, a major change to the IRA was introduced by Senator William Roth of Delaware. With this, the Roth IRA came about as a potential alternative with how contributions would be “recognized.” Rather than taking an income tax deduction when making payments, the ROTH IRA flipped the formula by allowing contributions to go in on an “after-tax” basis. Most importantly, withdrawals permitted during retirement could now be drawn totally tax-free. So, the introduction of the Roth IRA gave participants the ability to choose when they recognized and paid taxes. Roth plans have become extremely popular.

After fifty years, there are two major outcomes from establishment of the IRA program in 1975: (1) For the consumer, the IRA program helped accelerate the move towards a voluntary defined contribution formula where taxpayers could now decide how much to put aside. This started a mass exodus from defined benefit plans where the contributions and risks to the pension were normally held by the employer, and (2) What has not been as beneficial (as some participants had hoped) was the claim – with the original IRA started in 1975 – that income taxes on withdrawals would be lower because the recipient would be in a lower tax bracket. In many instances, that has not been the case. As a result, many retirees today claim that taxes are, in fact, higher than ever along with ”means testing” formulas with other entitlement programs that can and do drive up overall costs. One of the best examples of this potential scenario refers to the Income Related Monthly Adjustment Amount or IRMAA.

In the financial services industry, the growth of the IRA has represented a huge marketing opportunity for NAIFA colleagues and financial services representatives over the last fifty years. It has provided new marketing opportunities for advisors to broaden their menu of products. The “net effect” of this transition has allowed many to diversify their financial practices from strictly providing risk management products and now brings about the chance to offer financial accumulation products like the IRA, as well. This change has created a monumental marketing refocus that continues to increase after fifty years.

This transition also brought about the rise of products for the consumer where they could drop their permanent life coverage and “buy term life insurance and invest the difference.” The following decade of the 1980s brought about the rise of the A.L. Williams organization which paired the purchase of an IRA with term life insurance through Mass Indemnity Life Insurance Company. This became a very contentious issue among competing representatives in communities across the country and forever changed the manner in which life insurance and accumulation products were designed and packaged. It also brought about increased regulations regarding replacement, which has also created more regulatory oversight with the application process in general.

Ike Trotter, CLU, RICP, ChFC, is a Financial Professional in Greenville, MS. He has been a loyal NAIFA member since 1975. Opinions expressed are those of the author.