The No-Cost Way to Fix Flawed 401(k)s

• Report this Comment On January 17, 2009, at 2:13 PM, SRVENK wrote:

  I have always wondered about the disparity between 401k and IRAs regarding contribution limits. Well, after leaving a job, one does get to rollover, so why not allow it from the beginning?

  First off, 401K plans are a subsidy to the financial industry. The restrictions on employers that disallow various types of investments deemed risky are limiting to individual investors.

  The current situation underscores that all financial advisers and planners could be wrong. The other part of the problem is that many people cannot just sit and manage their portfolio, as they have to do some real work.

  This simple question has very serious underlying questions, and they are all very necessary to address. I would like to find out, not from any newsletter, but in a more comprehensive way from many fellows in similar situation as I.

• Report this Comment On January 18, 2009, at 11:36 AM, almond9090 wrote:

  The author has rediscovered the idea of Lifetime Savings Accounts proposed in the first half of the Bush administration. The first step, with a limit of $5000 per person per year, was included in the Bush FY'06 budget proposal, but was not enacted by congress.

  I support the author's basic idea of dropping eligibility restrictions on who can contribute to an IRA and raising the contribution limit to $20,000 or more. After dropping 401(k) plans, those employers that do match contributions (which, to be clear, is part of a COMPENSATION package, and not some sort of altruistic "benefit") should raise base pay in such a way to keep their payrolls constant (i.e., if there has been a 4% match, base pay should be about 4%, adjusted for factors such as employer tax consequences and prior participation rate (whereby those who never participated in the 401(k) plan are not eligible for a base pay adjustment)).

  I have another concern with regards to "coordinating IRA contributions with payroll departments." To me this implies an employer burden to ensure that the employees are contributing to a valid IRA plan. This would entail administration costs for the employer (even higher than existing 401(k) administration costs). I understand the practicality of direct deposit to a dedicated retirement account, and the employer should facilitate this, but not monitor which accounts are the designated IRA accounts. The responsibility for this should be left up to the employee and his/her accounting for the funds on the federal tax return. Those who are self-employeed would similarly self-direct their IRA contributions (which would replace SEP and Keogh plans as well).

  The funds from existing 401(k) plans should be subject to a 2 year sunset provision, during which time employees can roll the funds over to an IRA of their choice. After 2 years, any funds not rolled out of the 401(k) plan will be converted to IRA's administered by the same company who managed the 401(k) plan. After that, funds in any IRA are allowed to be rolled over into other IRA's if desired.

  Thanks for a timely article, even though it is taking advantage of everyone's current disatisfaction with 401(k)'s which is due to the broad market decline, and was only slightly exacerbated (if at all) by a lack of choice and high management fees of employee-sponsored 401(k)'s.

• Report this Comment On January 20, 2009, at 10:42 AM, SuzanneWynn wrote:

  This is the same as the Lifetime Individual 401(k) idea which has been around for years. Even if someone contributes the maximum amount every year over 30 years, it still leaves a very small amount of money at age 65 to retire on. What is needed is a lifetime portable individual defined benefit or cash balance plan which an individual could have in addition to the 401(k) plan offered by their employer. The individual defined benefit plan or individual cash balance plan would provide an annuity which the individual could fund over their working lifetime. I've discussed this idea at the Pension Protection Act Blog - http://www.qualifiedpensionconsulting.com/ppablog

• Report this Comment On January 20, 2009, at 1:14 PM, bulldogdan wrote:

  So what do you do when these employers reinstate their match in a year or two?

• Report this Comment On January 20, 2009, at 2:44 PM, bullguy wrote:

  This article is a sophomoric one-sided attempt to favorably compare IRAs vs. 401(k) plans. The company match is a substantial benefit and very few employers have eliminated their match at this point in the recession.

  Also, the majority of large employer 401(k) plans provide lower fee investment options than offered to individuals in an IRA. The "poor service" and "no good investment options" points are lacking any concrete factual basis. Also, a recent study showed that 401(k) balances on average had a higher rate of return than IRA balances.

  Bottom line: make sure you really understand what you are giving up with regard to investments, fees & services before you blindly rollover your 401(k) to an IRA just because of some "8th grade book report" article like the above.

• Report this Comment On January 20, 2009, at 2:47 PM, sbrkich wrote:

  Folks opening their IRA statements also were rudely shocked at their 2008 losses.

  Just as 401(k)s have so-called "hidden" fees that subsidize "free" recordkeeping, the mutual fund providers subsidize "free" IRA accounts through the same revenue sharing arrangements and transaction fees. Total IRA fees may actually be higher since IRAs do not have access to the lower cost funds available to 401(k)s. Having trouble selecting from 9,000 mutual funds and 3,000 registered equities? Independent advisers are available for an additional 30-100 bps off your return.

  401(k) educational materials are frequently criticized, but the content is strikingly similar to any materials provided to an IRA customer. (Could it be they are prepared by the same institutions selling product to 401(k)s??).

  The other "drag" factors mentioned (loans and hardship withdrawals) are intended to be restrictive as a matter of policy in order to discourage early withdrawals. Even so, an early withdrawal from an IRA is subject to the same 10% penalty (and would have been under the earlier Bush Administration proposals).

  Mega IRAs may be good for sophisticated "fools" who manage their assets as an avocation and want the broadest selection of investments. But most employees do not fit that description. IRAs are just another account, capable of delivering bad (as well as good) results depending on the user. The article is, in my view, misleading to the extent it portrays mega IRAs as a frictionless solution for retirement security.

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