What Would a Great Retirement Plan Look Like?
The following was originally published by Robert Schmansky, CFP® at Forbes on November 25, 2016 as How a Trump Administration Could Make Retirement Savings and Security Great.
While waiting this holiday weekend to learn more about our future government’s leaders, I have one simple fix to solve our nation’s retirement security problem: Cut the tie between retirement saving and employment.
Most understand the reasons for removing the healthcare ties to employment, but it may not be obvious at first the problems caused by our retirements by this same link. Our businesses bear tremendous costs and lawsuit risks in providing these benefits. The employer-based system is one of the few legal monopolies that produces poor investment plans with limited choices, and widespread rules on accessing funds, contributions and limits, types of contributions, and more.
Government overreach to manage this system constantly threatens advisors who provide advice to participants. The focus of government intervention is on picking winning products over planning and advice; one need only to search online for retirement plan financial regulations and to find no shortage of proposals which Washington would prefer to see your choice in retirement options removed and managed for you. Personal advice meanwhile is the only answer to the retirement security problem.
There is a simple solution that would mesh with President-elect Trump’s plans for tax code changes. Combine all IRA’s, 401(k)’s, 403(b)’s, SEP’s, SIMPLE’s, etc., into a new, privately-held account, with the link to employment severed. A potential name could be Unified Retirement Accounts or something similar. One standard contribution limit would complement a simpler tax code – perhaps $15,000 per individual limited only by income earned. Accounts could be opened at any provider. Tax-free Roth and pre-tax contributions would allow Americans options on what is best for their circumstances. Penalty and current access laws for IRA’s should be kept.
We already have a model for how such a system would be implemented. Health Savings Accounts can be opened with any provider, no matter what custodian an employer offers. Contribution limits are tracked across accounts via information returns and reported on an individual’s tax return.
This simple move to a voluntary system would remove costly litigation risk from our businesses, and yet firms could still provide preferred providers who would have reason to provide lower-cost services, or additional benefits such as free financial advice, to incentivize employers to advertise their accounts over their competitors.
Americans who do not have plans, don’t like their plans, are held to lower contribution amounts, or are ineligible for their employer’s plan would have the world of investment providers competing to provide retirement and financial planning to them. It would be a golden age for the retirement security of Americans, and the personal financial planning profession would flourish.
While some have suggested that changing financial regulations should not be a top priority for the new administration, changes to income tax and healthcare will have Americans seeking personal financial guidance more than ever before in the coming years. Retirement security needs to be a primary concern.
Perhaps the best part of removing the link to employment – government meddling in these accounts and threats to change the rules would largely end. Today we have agencies writing legislation that puts auto manufacturers at risk for their 401(k) plan. Individuals who want advice may not realize that advisors have increasing risks in providing advice on rollovers and employer benefits. And, the constant push of governments into retirement fund investment management as we have seen in states like California will end. The latter plans are setting up for future conflicts between government and investors, and government and investment advisors.
Today, more than ever, we need to promote personalized, financial planning services to provide the advice individuals will need with national and individual changes that a Trump presidency hopefully brings. There’s a simple solution to make retirement security great, and it is to stop providing products and allow individuals to access advice, on an equal footing to other Americans, with private retirement accounts.