How to Fix the Workplace Retirement System
About once a year I like to reintroduce my plan to better educate and service investors of the trillions of dollars in employee workplace savings plans. It’s a simple solution that would boost account balances, decrease employers expenses, and stop the insurance lobby and government committees from telling us how we should invest for our retirements.
What is my plan to solve all of these ills in their tracks?
Get rid of the workplace retirement plan.
Get rid of them. All of them. The 401(k)s, 403(b)s, SIMPLEs, SEPs, 457s, throw them all out.
Not convinced yet? Stick with me.
When you really think about workplace retirement plans – what sense does it make that your employer, who may be in the publishing industry like Forbes, or may manufacture widgets, decides what you invest in, and is held accountable for you? Why is our retirement tied to the whims of our employer, and a tax code that treats us differently based on what plan they choose to allow us?
With workplace plans your employer is put in the position to be legally obligated to look out for your investments. Why? What do they know about your financial plan, risk tolerance, or outside investment holdings?
Add in the ridiculousness of the different rules for contributions, distributions, or in-service withdrawal options of various plans. Why does it matter where one works as to the benefits they receive versus any one else? Why can I move my money out of a SEP whenever I want, but a SIMPLE only after being employed for two years, or a 401(k) only for certain and specific reasons?
I could go on all day about the differences employees, employers, and financial advisors need to be aware of in their plans, but the bigger question to my mind is… who are we discriminating against here, and why?
We’re no strangers to discrimination in our legislation or tax code, but the ways people are normally discriminated against almost don’t apply to the random way we are treated with our workplace plan benefits. Let’s at least figure out something to attribute to our neighbors that allows for them to save twice as much on a tax-deferred basis, start their distributions penalty-free nine years ahead of normal, and lets them compensate their financial advisor on a pre-tax basis through their plan.
Now, getting rid of plans entirely is just the start. I wholeheartedly believe employers should be allowed to contribute to an employees retirement account as a part of their compensation package. In my ideal world we simply move the same maximum retirement contribution amount from workplace plans to personal IRA accounts, and any amount that an employee contributes to an IRA custodian (of the employees choosing) through payroll direct deposit is matched. It’s the free market at work. We would have competition legalized for retirement savings, informed employees who could compensate less biased advisors than the plan sponsor allows, and employers who need not worry about being sued for their investing decisions.
Our retirement system is broken and it isn’t improving because we don’t have freedom of choice. Employees are captive to plans where indifferent employers, poor custodians, high-cost plans, and a government and insurance lobby that think they know what’s best makes our decisions for us. Because they don’t have a choice, they often don’t seek advice until retirement. If they do, they may only look for free and conflicted advice from the workplace plan.
Want to see what freedom of choice would mean for retirement plans? One simply needs to look at the 403(b) market where many institutions have offered choices to their employees.
If you have a Fidelity 403(b) you may have access to cheaper mutual fund share classes than even the wealthy Fidelity clients can buy on their own. If you have a plan with TIAA-CREF you may be able to work with an outside advisor of your choice and compensate them with your pre-tax earnings. Not all plans have the same benefits, and in fact, I find the plans that face more competition internally often have better benefits.
That model isn’t perfect, but it’s better than what we have. In the age of direct deposit to multiple accounts, there is no reason for captive retirement savings, and the government should stop wasting its resources on maintaining a system that benefits the brokerages and insurers to the detriment of the rest of us.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/