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

As you open your year-end 401(k) statement, you have to wonder: "Why did I work so hard to save all that money if it was just going to disappear?"

Angry? You're not alone. Across the country, employee investors in company-sponsored retirement plans like 401(k)s have lost roughly $2 trillion in savings, thanks to the stock market's plunge.

Even worse, though, are some of the further indignities you face in your 401(k):

• The fees that employer plans charge are often both expensive and hard to spot -- and even harder to avoid.
• Some of the companies that sponsor employer plans don't offer good service, leading to big hassles and huge mistakes that can cost you a lot of time and worry.
• Many plans don't offer good investment options, leaving you to wonder if you should suffer with a subpar plan just so you can get the benefits of 401(k) plans, such as tax deductions and matching employer contributions.
• Even if you dodge all the obvious bullets, it's hard to figure out how to make smart decisions with your 401(k) money. Employer stock, loans, hardship withdrawals, rollovers -- getting the information you need to pick the right choices can be next to impossible.

With all these problems, it's no surprise that 401(k) plans have come under fire from lawmakers and policy groups lately. Yet, perhaps the easiest solution is one of the most obvious ones.

Expand the IRA
We already have a perfectly good retirement account available for investors. The IRA gives you an immediate tax deduction and the prospect of tax-deferred growth. It also offers complete investment flexibility, as you can open an IRA with nearly any stock, bond, ETF, or mutual fund you can think of, as well as some other types of investments as well.

So, what's the problem? Well, the amount you can contribute to an IRA is quite low compared to a 401(k): $5,000 for an IRA versus $16,500 for 401(k) contributions in 2009. But a simple solution might include:

• Increasing annual IRA limits to around $20,000 and making them available to all workers, regardless of employer plan participation or income limits.
• Ending new 401(k) contributions but letting investors keep any amounts they already have invested or roll them over into IRAs.
• Coordinating IRA contributions with payroll departments to make it easier for workers to have part of their paychecks go directly to an IRA, just as what happens with 401(k) contributions now.

Most workers would find that this simple change would simplify their retirement planning while keeping all the benefits they currently enjoy.

Where's my match?
The only thing missing from this proposal is that you wouldn't get the benefit of employer contributions to your retirement. That free money is what's behind many people's decisions to contribute to 401(k)s in the first place.

But the sad fact is that many employers are cutting off such contributions anyway. Just look at some of the major employers that have suspended, eliminated, or are considering eliminating matching contributions:

Source: Yahoo! Finance.

That's over 1.3 million employees who don't have employers giving them their full support to help them save for retirement.

Given that so many large employers have largely given up trying to help employees retire, why should employees put up with the problems of 401(k) plans? Just give everyone the right to contribute more to their IRAs, give them the tools they need to invest smarter, and things will get both easier and better for all of us.

For more on investing for a better retirement, read about:

• 3 investment myths you shouldn't buy into.
• Are you lying to yourself about your retirement?
• Become a millionaire on just $20 a day.