Real Change: Outlaw 401(k) Plans
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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A simple solution would be to release all 401K funds to the owners (us) tax free, to do what we want with them, with an option to put them into an SSLF if that suits them or to put them into a taxable account, or into cash, tax and penalty free. Wanna give a tax holiday to the middle class? This is the way and the time to do it easily.
I really like that idea.
Some have done okay with 401k's. But most have not, especially people who have not had the benefit of 10 to 20 years or more of stable employers and employment (sector destruction at work!). Its also a mouse trap that is costly to move out of if you lose trust (no one's lost trust lately have they?) in the markets though there are some 'safe' funds that resemble safety only in historic terms. I have also found a profound lack of granularity in the selections available. I sidestepped the 401k thing for the past 5 years with very token contributions as I saw a bubble forming way back, now I am positioned to where everyone will be running in due time. The options I have chosen are NOT available in any 401k plans that only offer heavily diluted, questionable integrity and manipulated funds.
The 401k plans are also a ponzi scheme of sorts and people will be learning this in the coming years because historical performance is NOT an indicator of future performance.
How do you figure 401ks are a ponzi scheme? 401ks are made up mostly of mutual funds, and mutual funds don't use leverage and don't use new money paid in to make payouts if they've come upon bad times. Also, how did you see a bubble forming five years back? You missed a massive bull market from mid-2003 to Nov 2007 in stocks, even longer if you consider emerging market funds. Many funds were even up big in the first half of this year.
The phrase Ponzi scheme has been thrown around a lot lately, with you claiming that 401(k)s are one, and others claiming that OASDI is one. The fact of the matter is that a Ponzi scheme is, plain and simple, where a person takes in a bunch of money from investors, and then gets more investors, using THEIR funds to pay "interest" to the older investors. This does not describe 401(k) plans, NOR the Social Security system!
There IS a scheme in the 401(k) world, but it's NOT a Ponzi scheme!
Investment tools - OK, I had a 457K...and when I decided how to invest, I selected a fixed income, which did not make as much as those who were gambling in the stock market...b
At some point in time, all employees / investors need to take the time to learn the basics of investments and oh yes if you invested in risky funds because of the higher yields, why should I be totally sympathetic? You can't blame everyone else for all your problems, at some point in time you have to act and behave like an adult and assume some responsibility as you delegated someone else to manage your retirement.
As I am "older than dirt", during those days you had to buy a book and read about investment tools, which took a little more time, but now as it is all on-line and there is less excuse for ignorance.
I am no millionaire and am look forward to receiving Social Security Checks in the future...b
But to throw out the investment opportunity because so many lost money sounds a bit too reactionary.
This sounds like a child that got burned by putting their hand on the stove... so you want to throw out the stove?
I did. I spent a whole year reading various (and often differing) opinions, articles, books about money, investing, and retirement. It wasn't easy because economics/business isn't my thing but I forced myself to learn as much as I could. And then I watched the Enron debacle unfold (I wasn't invested in Enron). When the corporations hide their debt/cook the books or do whatever they can to make things look BETTER than they actually are (using the latest fancy investment tool . . . credit default swaps ringin' any bells here?) all the education in the world ISN'T going to protect you.
Enron was one stock among several thousand on the exchanges. Even if it was a holding of your mutual funds, you wouldn't have taken much of hit because you'd have been well diversified. Plus, as you get older you should hold more bonds and less stocks, particularly US treasuries which were up something like 25% last year.
So, do you know what company stocks your investments are comprised of? My guess is no. That's the problem. Nobody knows what they're investing in. They just want some magic return money back year after year. It's ridiculous on its face.
Submit your proposal to the Obama team and Congress. They might like it.
Dan Solin misses the boat again. He really needs to do some serious calculations on 401K plans other than on the back of an envelope.
Maybe I am not the average investor, but I am doing quite well in retirement based on my 401K, IRA, and Social Security. About 2/3's of my savings are in various tax deferred accounts. For most of my career, I was not receiving company matches to my 401K.
I could never survive on just a 5% return of a guaranteed benefit plan. So please don't offer me that as an alternative.
Over the past year, the value of my portfolio has dramatically lost value. However, I was able to make adjustments so that my dividend income has remained the same or even gone up a little.
Why take advice from all the complainers who have managed to botch their own retirement accounts?
"why take advice from all the complainers who have managed to botch their own retirement accounts?"
touche, sir
You can do as well as you wish, but don't tell us it's OK for the financial industry to skim our portfolio of unnecessary fees that serve no other purpose than enriching them at our expense.
Did you take a minute to ponder how much better you'd be if you could have avoided this robbery?
"why take advice from all the complainers who have managed to botch their own retirement accounts?"
So you won't lose the value of your portfolio again. That is a serious loss, even if you are still getting good dividends.
The only thing good about the 401k is the employer match. I would put only into the 401k what the employer matches. You can put the money into savings in your 401k. That is an instant 100% return. I hear many employers are going to stop matching. j
We were lucky that Social Security wasn't in this devious market.
"I could never survive on just a 5% return of a guaranteed benefit plan."
Since a guaranteed benefit plan has as its general rule a defined benefit, usually based on something like the top three years of your salary, HOW would you not be able to survive on that??
In a defined CONTRIBUTION plan you are correct, 5% per year, even with company matching, is not enough to survive on, but in a defined BENEFIT plan the only one who might become hurt is the EMPLOYER if they don't invest it correctly!
You are pointing out the critical flaw in the 401(K) plan, that the retirement of the majority of Americans is dependant on free market, for-profit forces. It was only a matter of time before Wall Street learned to game the system, and we are now gambling with the future retirement of 3 generations for the profit of a few.
Compared to the governing paying retirees with money it doesn't have -- as in social security? Second, a 401K plan is not the equivalent of gambling. I like how people love their 401Ks when stock values and corporate earnings are going up, but call it "gambling" during every bear market when values and earnings are dropping. Do people not understand that stocks don't go up every single month or every year after year? Remember how much people loved their stocks in the 1950s and 1960s but hated stocks in the 1970s when the market didn't go anywhere for so long? Then look what happened after that... A massive boom from 1982 all the way to 2000, a multi-year drop, then new highs again in 2007. If you can't take a bear market, then get out.
Funny stuff, Dugan. I do disagree about it not being a gamble, though. Good times or bad, investing is gambling. It's no different than buying lottery tickets. I can guarantee that I'll win the lottery a couple of times a week by buying a few tickets everyday--I'll only be winning $2 or free tickets, but I'll win. Just like market investing, the more guaranteed a return is, the lower the amount and vice versa.
The government isn't paying Social Security. Everyone who draws a paycheck is paying into Social Security and Medicare. The contributions are matched by your employer. We are even paying extra into Social Security to keep the load off of the younger workers. The government has borrowed that money and they need to pay it back, down the road, when the boomers need it.
Part I
You obviously do not understand Social Security, or more accurately Old Age, Survivors, Disability Insurance (OASDI). The OASDI program is not a retirement plan. It is an INSURANCE plan, where you pay into the plan your premiums (in the form of a payroll tax) and then once you are unable to work, whether because of disability or old age, you will get that money paid back out over time.
In addition to that, the OASDI program is not in the dire straights that you appear to think that it is. There is an issue right now due to the fact that the govt has been borrowing the money in the trust fund for decades (started by your buddy Raygun....
Part II
And then there's the trust fund itself. Like other insurance plans, they take in the premiums, cut their own costs (which are MUCH lower than a private insurance company's.
When corporations are no longer tools for making money for a tiny minority disguised as engines for general wealthmaking, then we can get somewhere.
But when the most powerful entities in America are working for themselves, and not for America, aren't we simply rowing against a tide?
Why not keep the plans the way they are, but make sure everyone has a choice to invest in low-cost index funds? My plan includes Vanguard funds, which are regularly cited as the "gold standard" of low-cost buy-em and hold-em index funds.
You have a contradiction here friend. When one transfer funds from one type of investment to another the money is still in the hands of money-mangers and the fund sellers take a cut. Your new plan does not change that. Whether straight (after-tax) mutual fund, a 401(k), IRA, life insurance, 529 plan for college, it's all in fund mangers' hands and it's not free to play. Only difference is the IRS's tax status of the gains and the withdrawls. The 401(k) helps the working class folks more than anyone. It helps the market going up too. As the fund mangers have employee payroll deductions coming into the market, they must invest it that month. This keeps the market going up over time. When salaries go up, employee deductions go up too. But the average investor can get greedy. I heard this once: your age plus 10 -15 years - that is the percentage one should have in 401(k) funds that use U.S. T-bills. Place the rest in stock/bond funds. Then if you have a big market drop, like this one, you can use the 401(k) dollar cost average over six months some of your reserve (say a qtr or half of it)into the down market. Simple. No one should ever be in the market 100% of the time, maybe Warren Buffet is the excepton. As the old saying (my father's) goes: bears feast on death, bulls graze on growth, but pigs get slaughtered.
I always heard to put less in the stock market as you get older. You put your age into bonds or savings. Say you are 50 you would have 50%/50% and if you are 65 you would have 65% bonds/35% stocks.
What happens if you live to 101?
I don't want to invest in any of their stinking funds. My 403(b) offers more options than this. Why would I want fewer?
I don't like it. I would rather see all 401K plans become a nationalized guaranteed defined benefit plan paying somewhere around 5%. Now, if one would wish to additionally buy into more risk oriented investments, then so be it. But, at a minimum, there would be this defined benefit plan which all working Americans would pay into even with employer matching funds.
If this were the case today, we might all be better off.
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we already have that Ponzi scheme it's called social security. We all pay into it but not for any type of savings for ourselves but to pay off those that made this investment before we did. This is exactly what Madoff did (new dupes pay off the old dupes until the last dupe is left holding the bag) but at least people invested with Madoff of their own free will, Social Security is forced on us
So all insurance plans are ponzi schemes? I think the right should keep hammering away at social security-- it will highlight how out of touch they are with the rest of the country.
it's not actually a Ponzi scheme... there will not be a "last dupe left holding the bag"...
it's a "we all pay into it, so that we all benefit from it" scheme... sounds like me kind of scheme.
the only problem is greedy politicians who are against openness in government
think of how many people have benefited by having social security..
It's not a Ponzi scheme, it's an INSURANCE PROGRAM!!! Thus the name OASDI, which stands for Old Age, Survivors, Disability Insurance! So I assume that you want to outlaw all insurance companies for running Ponzi schemes? Since, you know, everyone that got in early is just RAKING in the dough from Social Security!!
Mr Solin is incorrect to definitively prefer Roth-style investment vehicles (using post-tax dollars) - for many people, it is preferable to use pre-tax dollars. This is a common misconception, even among profession financial advice-givers.
Not all 401K plans are rip offs although, unfortunately, many are. I was reasonably happy with mine when I was still working. It had a generous matching formula, some low fee (or even no fee options) and all fees were disclosed to employees who bothered to make the effort to read the plan documents. The plan also offered a no-fee stable value fund which consistently offered above money market yields. By keeping most of my 401K in this fund, I was able to avoid the 2000-2002 market meltdown and a lot of stress to boot. As bad as things look like on the 401K front, they are worse for the average employee in Canada who invests in an employer-sponsored retirement plan (known as RRSP). Mutual fund fees in Canada are among the highest in the world and low cost US funds are off limits to Canadian investors.
Once again the answer is self evident.
Open the "government" plan to ALL.
Just like we should provide Medicare for ALL, or the same plan that governement employees (i.e. republican senators) receive.
It's funny that these republican "conservatives" extol the virtues of "free market" solutions, which are neither.
The tax benefit received by most contributors to 401(k) plans is more than offset by the expenses and losses they endure.
My mother would have been better off buying a CD every few months with the money otherwise diverted to her 401(k), which costs too much and is worth far less than the money invested.
"The tax benefit received by most contributors to 401(k) plans is more than offset by the expenses and losses they endure."
The tax benefit is not more than offset by the expenses. Losses historically have been short term, and for most with many years or decades until retirement, a drop in the market is an excellent time to accumulate cheap stock.
since investment companies are paid based on the amount of assets under management why exactly would these same companies try to steer investors toward losing investments? Coupled with the fact that once someone leaves the company they can roll their 401(k) into an IRA and an investment company that intentionally ran the 401(k) poorly would have little chance of convincing the investor of choosing their IRA this again begs the question: why run the plan poorly?
So for the millions of Americans that do receive a company match they should have to forego this because some other Americans don't receive a match? Some Americans are better at other things than some Americans, should we have a handicap general a la Harrison Bergeron?
Since the government is already running the largest Ponzi scheme by far under the name of social security and medicare do we really want to give them more of our money?
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