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May 15, 2009

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Why not just increase the IRA maximums to $16,500 per year and eliminate the income requirements? That way employees would have the freedom to chose any funds they wanted. Why do I have to be limited to the 12 subpar funds offered by my employer? I can do a lot better on my own.

I agree. What's wrong with the 401K? And I always hate it I'm "opt-out" automatically enrolled in anything--too forced. And I agree--people want the rewards of risk without the risks of risk--what can you do?

BTW, my employer rolled out 1.5 years ago an automatic enrollment "autodistribute" "Opt-out" option for our 401K program. It was supposed to autodistribute your 401K investments among various bond, index, other funds according to some formula that would theoretically give you the most benefit according to your age etc. Since I couldn't get them to say exactly what would happen to my account and why and when if I used their formula, I opted out. This saved me from losing the huge piles of $ that everyone who used this service did. Some of my colleagues lost money from using this even before the market crashed. Afterwards? A blood bath.

This is one of my favorite "policy wonk" issues. I'd do the following:

1. Get rid of "vesting" and probationary periods. You're either in the plan or you're not.
2. Have two types of plans: the "nanny plan" where the whole 401K goes into a central investment pool, invested in index funds, and the "self-managed plan" where the whole thing goes into a self-managed account at your own brokerage.
3. Have a "default" registration, and have it be the "nanny plan".

and the one we need to shout from the mountaintops:

4. DON'T LET CONGRESS ANYWHERE NEAR THE 401K! No "social security" nonsense. Congress makes a hash of anything it touches.

I agree the core problem is undereducated/miseducated people who made foolish choices within their 401ks, not the system itself.

However, Rob G. brings up a good point. Why is retirement saving linked to employers at all? I suppose the argument against doing away with 401ks and beefing up IRAs is that then we would lose the benefits of corporate hand-holding provided by HR departments. I think that's a sacrifice we can live with.

My biggest problems with the 401k are the undisclosed fees and the loss of control over your investment choices. In my SIMPLE IRA we are free to choose any fund from several share classes that we choose with the Fund company that hosts our plan (if "hosts" is the appropriate term). My company is about to move to a 401k and I'm very hot and cold about it, hot for the larger contribution limits, cold because of those two things and A SIMPLE IRA MUST be matched at some level and a 401k doesn't. I will be happy if there is a self directed brokerage account option in our new 401k, but not all providers offer them and it probably isn't likely.

I agree with the first poster, ideally IF the IRA could be funded through a payroll deduction and there were tax incentives for employers to contribute a matching portion.

One aside: I'll admit that if 401Ks are changed, my family will get massively nailed with taxes. Self-employed 401Ks are about the only way to legally avoid monstrous taxes if you are self-employed. With this, we save almost half my wife's self-employed income in her SE401K. (They are way, way better than SEP-IRAs.)

I have a W2 job, with a non-matched 401K that I fund to the legal max, so between our two 401Ks, we put over $40K/year in them.

(Yes, I know there's an argument for paying taxes now versus later if you have a monstrously comfy retirement arrangement with income, but that won't happen for us, and I'd rather focus on lower taxes today. Also, I suspect the next big tax innovation will be in consumption taxes.)

They should definitely require 401k plans to tell us all the fees. The fact that they don't have to seems ridiculous to me.

I wouldn't get rid of 401k's but additional options would be good.

People do have a tendency to be poor managers of their own 401k's so giving those people an alternative with automatic savings and guaranteed rates of returns would be a good idea. But only as additional options, not as replacements.


FMF, I guess you can add 'created 401k' to the list of things the government did right. ;)

"Was there ever a problem where government got involved and people said afterwards, "Wow, now things are a lot better"? Nope, never. Ok, maybe once or twice, but that's it."

C'mon, FMF, you are too smart to use rhetoric like this. You eat food and drink water every day that is safer because of government regulation. You live in Michigan, so you probably drive with great frequency, maybe even daily, along highways that were built with federal money. You are substantially less likely to die in a car accident while driving along because of the dreaded tort law. You live in a society where children are literate instead of savages toiling twelve hours a day in factories because of government regulation and funding for public schools (and the dreaded unions). Your kids will have access to student loans because the federal government guarantees them. You can use public libraries because the state and/or local government pays for them. Mandatory vaccinations are a creature of government policy. Your parents can draw on Social Security and Medicare, giant federal programs. All the beautiful parks in Michigan? Funded by the government.

I'm by no means saying that government intervention is the solution to every problem, or that it's not possible for the government to intervene badly, but the kind of language you just used there implies a huge and shameful civic and historical ignorance that I know you don't have.

IMO, there are only three real problems with 401ks:

1) People don't understand the funds they're investing in or the costs associated. Often, all they see are "these are the recent returns from this fund", which is almost useless. 401k providers should be required to post not just returns, but expense ratios, and some sort of "estimated risk level" like Vanguard does with their core funds. This way, people who want to actively manage their 401ks can at least do so semi-intelligently.

2) Many of the people who are complaining the loudest are people near retirement whose 401ks contained too many stocks and too few bonds -- in other words, people who didn't rebalance their risk based on their timeline. IMO all 401k providers should be required to include some sort of low-expense "target retirement date" based funds that are, essentially, blends of stock and bond indices that automatically weight more heavily toward bonds as they approach the target retirement date. (I view this as much like the "nanny plan" suggested by Foobarista.)

3) Too much of people's money is going into a broken Social Security system that doesn't actually invest or save anything, but that leaves people expecting to be "taken care of" in retirement. IMO the government should phase down social security (not completely eliminated, but set it up as an "emergency" thing rather than a "general retirement" thing.) Then take what people are currently paying in SS payroll taxes and require all employers to offer basic 401k/403b/IRAs in their place (even for part-time employees who might not otherwise be eligible under the current rules.) IMO such a system should be an opt-out system, so that everyone who works automatically is saving for retirement unless they explicitly opt out.

The net result is that virtually everyone automatically invests for retirement, usually in funds that are properly risk-balanced, but those who wish to do otherwise have access to the information they need to make informed decisions.

I totally agree. Keep the government out. I'm getting so tired of so many people making bad decisions and then the people that do the right things have to pay for it.

Also, keep everything indexed for inflation.

As mentioned in the post...involving the gov't in financial affairs is historically helpful basically never, so count me in on the, "don't get the gov't involved" vote.

My biggest problem with 401k plans is the relationship between vesting and modern employment trends. I know very few people my age that hold a job for more than a few years (not speaking of poor workers, but solid workers who simply move jobs or change careers). Landing a job and staying put for 30+ years is virtually extinct, or at least FAR less common. Take me for example; I have worked 5 corporate jobs in the last 9 years. I have worked my way up in each of them, then left for better opportunities, but was never able to be vested in any of their 401k plans.

I would like this portion of the plan changed/tweaked, but is there any way we can do it without involving the gov't??? Pleeeeeeeease say yes! ;-)

Sarah --

We both know that we both disagree on the role, size, scope, funding, etc. associated with the government. And while my initial statement was meant to be over-the-top to make a point, I do think that most things run better without government involvement.

And, BTW, those things you refer to as "federal money" and "funded by the government" I refer to as "our money" and "funded by us." After all, it's our taxes that get collected, spent, and, in many cases wasted, not some sort of "federal funding" at magically appears from nowhere.

I think we just need to disagree. That's ok though, we still have vinegar and salt chips...

I would like to see retirement plans simplified.

Now we've got IRAs, 401Ks, Roth IRAs, Roth 401Ks, 403s and a whole bunch more that I haven't even gotten around to listing off. I'd like to see one account and carry over contribution limits.

Although the biggest problem is one of complexity. On one hand you have 401 plans that allow you only one choice of an investment company which seems simple, except that there are several hundred mutual funds in there to pick from. On the other hand, you have IRA accounts where the sky's the limit. From mutual funds to options trading.

I'm not sure if there is a best way to deal with this degree of ever expanding complexity.

I consider government intervention to be a very bad idea. Do you really want to give the government more of your retirement money when these are the same people who already ripped all of the money out of the Social Security trust fund and replaced it with IOUs? Let them get Social Security working first. Then maybe I'll be interested in the opinions about fixing the rest of retirement.

One option would be to make wider use of financial advisers. As finance becomes more complex having a specialist around to consult with could be useful to many people. Of course meeting with an adviser and following through with their advice may require more effort than people are willing to expend.

Another option would be to have a collection of private pension funds that employers are required to contribute to. If the pension fund was separate from the employer than people could build up sizeable pensions even if they job hop. Current pension funds basically penalize everyone who doesn't work for the same employer for something like 20-30 years.

Sarah,

Perhaps you should reexamine your own assumptions before patronizingly telling people that they're too smart to use "rhetoric like this". First of all, rhetoric like what? Cheap? Sleazy? I'm sure you're too virtuous to engage in anything like that, despite what the last paragraph of your comment implies. Look, if you're out to insult people, at least be honest enough to do it without the backhanded compliments. Whether you come right out and call someone ignorant or just imply it, winking and nudging, it's still an ad hominem attack that doesn't do anything to advance your argument.

Now let's get back to reexamining those assumptions. Of the examples you provided, only two are necessary government functions: mandatory vaccinations and tort law. I assume you called tort law "dreaded" because it has critics on the right. The critique is that it's a good idea implemented badly. The right clamors for reform of tort law, not its elimination.

So let's look at some of the other examples. With publicly funded schools operated by public sector labor unions, children are literate; otherwise, they'd be savages toiling in factories 12 hours a day? I feel pretty safe in calling that out as a false dichotomy. Surely productivity gains over the last 100 years deserve some credit too, so it's far from obvious that children wouldn't be at least as well off without public schools in their present form. And we can't really call all children in the current system literate. There are plenty of public schools, most often found in Democratic-stronghold cities, that are an outright fraud of education. Many children in those schools might actually have better prospects if they drop out to join the labor force and learn marketable skills that way.

Did it ever occur to you that access to federally guaranteed loans, among other government programs intended to make college more "affordable", is a big part of the reason that college tuition has gotten so high? Of course, the law of supply implies that if there is more money available to fund college education, we should get more of it. Unfortunately it's not that simple; there are significant barriers to entry. Existing educational institutions use boards of accreditation to limit competition. So even if these federal programs increase access to education a little bit, a lot of that money ends up allowing faculty to have cushier teaching schedules and being spent on things peripheral to education, like campus amenities. Meanwhile, parents and students bear these costs as nondischargable debt, to say nothing of the taxpayers' money wasted.

Now the big ones: Social Security and Medicare. Like some of the other examples you listed that I didn't address individually, they do of course have benefits. But they also have costs. Almost anything that the government does can be made to look good if we ignore the costs. In the cases of Social Security and especially Medicare, the costs are so large that we simply won't be able to deliver what we promised. They're on a trajectory that's unsustainable. The fatal flaw of these programs that makes them an all-consuming slow-motion disaster instead of merely a small wealth-destroying nuisance like the beautiful parks in Michigan is that they failed to index the age of eligibility to life expectancy. If the age of eligibility were around 80, which would put it on better parity with what it meant to be 65 years old when the program started, people would stop retiring too soon. Paying potentially productive people to sit idle is not a win for civil society.

Frank and Rob G. - what about employer match? Getting rid of 401K in favor of a right to a larger contribution to IRA would be expensive for those of us who get employer match. Not to mention that employer match does provide a stimulus for people to save money for retirement.

At the same time, I'd welcome the ability to simply use a "window" to a brokerage account as one of the options in addition to options that exist currently. I like foobarista plan, but I'd like these options within my current 401K so that I can still preserve my employer match.

Totally agree about keeping government out of it. Sure, nothing wrong with more disclosure about fees, but no government-management plans. We have Social Security as an example of how well the government is in managing money. Or any business for that matter.

The attacks against SS and Medicare are off base. The programs are self sustaining. The reason there are looming deficits is we are spending and have spent the money allocated to those programs on general budget items. This has allowed us to cut a variety of other taxes (income, capital gains etc) because we have used the revenues from SS and Medicare in combination with borrowing and deficit spending.

The chickens are now coming home to roost. But it isn't the fault of SS or Medicare. And it isn't the fault of government. It's our fault because to paraphrase FMF, we are the government.

I have a few gripes with 401k plans, including the limited investment options, but there's no way I would want the government controlling even more of my post-retirement income. I say leave it alone.

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