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The Law Change That Changed the World
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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 ser vice 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 under funded. And many times, a company would buy another company not be cause 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 ques tion. 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 em ployer 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?”

“The biggest stock market crash of all will be caused by millions of peo ple 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.”

“So it is survival of the fittest?” I asked.

“It will be survival of the financially fittest and the financially smartest,” said rich dad. “It will be survival for those who are prepared . . . just as Noah prepared for the future by building an ark. I have been training you boys to build an ark also.”

“We're building arks?” I chuckled. “Where is it? I don't see one.” “The ark I have been helping you to build is inside your head.” “An ark inside my head,” I said cynically. “That's a new thought.”

“Look,” said rich dad as he reached for a serving of food. “If you don't want to prepare, then tell me now. Don't waste my time. Do you think I like scolding you for mismanaging your business and your personal finances? Have I been wasting my time and my faith in you? If I have, tell me now.”

“No, no, no,” I pleaded. “It's just the ark. I have a hard time with this building an ark concept . . . especially in my head.”

“Well, where do you think money, investing, and business take place? They take place in your head. If money is not found in your head it will not be found in your hands,” said rich dad angrily.

“Okay, okay, okay,” I said apologetically.

“Look,” said rich dad. “There may or may not be this giant stock market crash. But I can assure you that there will be booms and busts . . . there always have been booms and busts in the past and there will always be booms and busts in the future. Predicting that booms and busts are coming is not much of a prediction. You boys are in your early thirties. You have a good financial foundation and you're gaining great business experience. You are now old enough to face the real world. Just as you practice surfing nearly every day, riding the ups and downs of the waves, I ask you to practice riding the ups and downs of financial markets and financial cycles. If you do that, your skills will improve.”

“So markets boom and bust just like the waves on the ocean,” I said.

“Correct,” said rich dad. “They're called business cycles.”

“And you think that ERISA is like a storm out at sea that will soon be sending waves crashing on shore . . . altering business cycles for a long time,” said Mike.

“In surfer terms . . . the answer is yes. That is what I think,” rich dad said as he finished his meal. “There have always been booms and busts . . . but I believe this law change will lead to the biggest boom and biggest bust of all.” “But what if you're wrong?” I asked.

“If I am wrong . . . and if you do what I suggest, at a minimum you will get richer and richer. You'll get richer and richer because you will be building your ark . . . a financial ark in your head, and that alone will make you rich in a good economy and in a bad economy.”

“Okay,” I said. “I'll keep this ark idea in my head and think about it. I'll think about it as preparation and planning for the future, preparing as Noah did for something that might or might not happen. But what makes you think this change in the law will have such a big impact and cause such a large market crash?”

“Because changes in the law change the future,” rich dad replied. “For example, if the government changed the speed limit on this small street in front of this restaurant from twenty-five miles per hour to a hundred miles per hour, we would see some immediate changes. Immediately there would be more traffic accidents and more fatalities. That is how law changes change our future, good and bad.”

“And this law change, what has it changed? Why can't we see the changes? Why aren't these executives sitting all around us as concerned as you are?”

Rich dad took a fresh paper napkin and wrote the following letters on it:

DB

DC

“The reason the executives around us and the workers who work here are not concerned is because I believe we are now in the transition period between DB pension plans and DC pension plans.”

“What?” I asked. “DB to DC plans?”

“DB pension plans to DC pension plans,” said Mike. “Most people are like you, unaware of the differences between the two plans . . . and there are massive differences. Most of the executives sitting around us are still thinking in terms of DB pension plans . . . not DC . . . that is why they are not concerned. They are not aware of the changes or the future consequences.”

“When will these executives start becoming aware of the differences?” I asked.

“The lag time is pretty long,” said rich dad. “I predict that it will take twenty-five to fifty years before people become aware of the full impact of this law change.”

“You mean sometime around the year 2000, we should begin to notice the changes?” I asked.

“Oh, you will begin to notice the changes way before that year,” said rich dad. “Although people will notice the changes, such as smaller booms and busts in the stock market, I don't think people will be aware of the frightening consequences of this law change until the year 2000 or later . . . maybe too much later.”

The bill was paid. As we stood up from the table, our favorite waiter was already wiping it off, getting it ready for the next group of hungry diners. “And what are you doing to be prepared for these coming changes?” I asked rich dad.

“I'm already prepared. I've already built my ark,” smiled rich dad as we stepped out on the street. “The problems will not be my problem. But they will be your problem. I will not be around when the real impact of this law change hits. Your dad and I will be gone and buried before the tidal wave hits shore.”

“So this law change is almost like your generation passing on your prob lems to our generation,” I said, testing rich dad's receptivity to the idea of in tergenerational passing of the buck . . . or the passing on of the problem . . . as it is in this case.

“I'd say that is pretty accurate,” said rich dad. “It's the World War II gen eration passing on the problem to the baby-boom generation, and coming generations . . . a problem my generation has benefited from.”

“Your generation benefited and now my generation pays for your bene fits?” I asked. “That is the legacy we inherit?”

“That is part of the story,” said rich dad with a sly smile. “First let me explain the difference between a DB pension plan and a DC pension plan.” Rich dad went on to explain that a DB, or defined benefit, pension plan was a retirement plan that defined the benefit or the dollar amount a retired person would receive. For example, if an employee worked for forty years for a company and retired at sixty-five, a defined benefit might pay that em ployee, let's say, $1,000 a month for as long as he or she lived. If that em ployee lived to sixty-six, the company actually did well because the company only had to pay the defined benefit for a year. If the ex-employee lived to 105, the company paid the $1,000 a month for forty years. In this case, the employee was much better off, but at the expense of the company. Social Se curity is a government DB plan.

Subsequent changes to ERISA may allow companies to switch to DC, or defined contribution, plans. The difference between a DB and DC plan is found in the difference between the definitions of the words benefit and contribution. A DB plan defines the benefit whereas a DC plan is defined by the contribution. In other words, a worker's retirement is only as good as the contribution . . . if there is a contribution.

A worker might retire with nothing because he or she contributed noth ing. In addition, if a worker retired with $2 million in their plan and that $2 million was gone by age eighty-five either through distribution or by mis management or market crash, then at eighty-five this worker was out of re tirement funds and out of luck. The worker could not go back to the company and demand more financial benefits.

Simply put, the responsibility, expense, and long-term consequences of retirement will pass from the employer to the employee. Although the difference between the letters DB to DC is small . . . the long-term consequences are, and will continue to be, large. As rich dad said, “It's the World War II generation passing on the problem to the baby-boom generation, and coming generations . . . a problem my generation has benefited from.” In other words, they got the benefit and now we get the bill . . . and it will be a very big bill.

Returning to rich dad's office, I gave both of them a hug and thanked them for the lesson. I was starting over again, without any money, without a job, but with a wealth of knowledge and experience. Although a little wor ried and nervous, I was ready to get back to working, looking for a new busi ness opportunity to begin building a new company.

“I have one more question,” I said, looking at rich dad. “Many of those executives in that restaurant are not aware of the difference between a DB and DC pension plan?”

“No. I would say most aren't,” said Mike, stepping in for his dad. “And that is going to cause the bigger problems in the future. Because they are not aware, they are not preparing for the future. They still think that after retire ment, there will be plenty of money for as long as they live.”

“I'm afraid that many of your generation will be forced to live at a lower standard of living, after they retire, than my generation will,” said rich dad. “Most of my generation still has DB pension plans. They can retire to the golf course community and play golf and bingo all day. Many of your generation will never be able to retire. Many, in fact I would say most, will work all their lives, some because they want to, but most because they have to.”

“I hope they love what they do,” I said with a smile.

“That is short-term thinking,” said Mike. “I've looked into this and statis tics show that 25 percent of all workers are disabled at one time or another after retirement. Some are permanently disabled and some are just tem porarily. So that is why just believing that doing what you love is a solution is shortsighted. Our generation and future generations need to think long term, because we will live longer . . . but the question is, Can we afford to live longer and can we afford the rising costs of health care? And what happens if we are one of the 25 percent that is disabled and cannot work, cannot do what we love? Those are more pertinent questions you and I need to ask ourselves, our families, and our workers.”

“And right now we are not asking those questions,” I said, looking at rich dad.

“No, I am afraid not,” rich dad replied, checking his watch. “The problem with most of the executives in that little Chinese restaurant is that most of them think they have the same DB pension plans their parents had. They may think that way because they work for large corporations. But in the near future, large corporations will switch to DC pension plans and most workers, even the executives, will not be aware of the long-term consequences of these changes.”

“And working for a large corporation is like working on board a large cruise ship,” said Mike, jumping back into the conversation. He had done a lot of research and was very concerned about the future. “In the old days, once a worker was through working, the corporation gave the worker a stateroom in the back of the ship. The retired worker joined the other passengers, enjoying the benefits of working for the good ship SS Good Corpo-ration. The retired worker was soon dancing the night away, listening to Benny Goodman music, sipping champagne, and playing shuffleboard all day. But that was the past. The SS Good Corporation may now throw the re-tired worker over the side with a small life preserver known as a defined contribution plan.”

“And what if there is nothing in the defined contribution plan?” I asked. “Not the ship's problem,” said Mike.

“Try building an ark out of a life preserver,” smirked rich dad sarcastically. “Most people are not trained to build arks, so most people will spend their later years of life clinging to tiny little life preservers and handouts from family and the government. That is why I want you two boys to begin building your arks now . . . and if you do, when the changes come, you will have your own large ship . . . your own ark . . . big enough and strong enough, able to with-stand any storm at sea . . . and trust me . . . there is a storm coming, a big one.”

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