President-elect Obama ran on a platform of "real change." Here's my proposal which would make good on that promise:
Outlaw 401(k) plans. Throw them out entirely and replace them with something that would be an economic stimulus for those who need it the most.
The 401(k) system is a disgrace. Employers get paid off in the form of subsidies to select brokers and advisors who control the investment options in the plan. They, in turn, get paid off by fund families and insurance companies which limit employees' investment options to costly, under-performing funds.
The fox guarding the hen house is the big winner. They have a vested interest in steering employees in the wrong direction. That's why there is no standardized investment education.
It gets worse:
The hidden costs in these plans were starkly illustrated in recent testimony before Congress. The mutual fund industry was aptly describe as the world's largest "skimming operation". It views the $12 trillion in 401(k) assets as a "trough" from which it siphons off an "... excessive slice of the nation's household, college, and retirement savings."
Let's just admit defeat. We are no match for this powerful industry. We need to stop tinkering with these plans, toss them out, and start all over.
Here is my proposal:
All employees would be eligible to participate in the Solin Self-Reliance Plan (SSRP).
Think of the SSRP as a Roth IRA on steroids. There would be no income limitations on eligibility. The contribution limits would be the same as a 401(k) plan: $16,500 for 2009. Contributions would be made with after-tax dollars. The balance of the Roth rules would apply:
No penalty for early withdrawal of the amount contributed;
Tax free withdrawals after 59 1/2.;
No required minimum distributions at any age
Here's the twist:
In order to qualify for the SSRP, you would have to take a standarized, short (5 question) questionnaire, available on the Internet. The results of the questionnaire would suggest either (i) one of 5 pre-allocated, globally diversified, low cost portfolios of index funds, Exchange Traded Funds or passively managed funds or (ii) Target Retirement funds, consisting solely of low cost index funds. It would list fund families who qualified to provide these fund options. The fund families would be required to disclose all costs charged on a standardized form approved by the Department of Labor. The employee would then select from these options.
By limiting investing options in this way, employees are assured of making intelligent choices. This is precisely what the government does with its wildly successful Thrift Savings Plan, the 401(k) plan available to government employees.
I can hear the naysayers now.
What about the corporate match?
Ask employees of Frontier Airlines, General Motors and Kodak. These mega-employers have stopped matching 401(k) contributions. Many more are sure to follow.
What are you really giving up, even if you got the much-hyped match? You still would have to pay taxes at your marginal tax rate when you take distributions. How confident are you that this rate will not offset most of the benefits of the tax deferral? Wouldn't you rather know that your distributions will be tax free?
What is the value of intelligent, low cost, high performing investment options over expensive, high cost options available in most 401(k) plans? Impossible to calculate, but very significant.
Now for the real kicker:
What is the value of not participating in a system that is ripping you off to benefit your employer and the securities industry?
There was a time in this country when rugged individualism was valued. It's time to return to those principles.
The Solin Self-Reliance Plan would be a major step in that direction.
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