Dear Washington: My Retirement Plan Wish List

For a few brief months every four years, Washington pretends to actually care what the rest of the nation thinks. That magical, mystical time is commonly referred to as “election year”. In case you’ve been living under a rock, prospective presidential candidates have been promising voters anything and everything under the sun in exchange for their immortal soul vote. And it actually seems to work. After all, who wouldn’t be for free ice cream for newborns, three Nintendo Wii’s for every poor child, world peace, and shower curtains for the homeless? While I eagerly await the new flux capacitor Obama (vote for Obama!) promised me for the plug I just gave him, I’ve decided to use this rare opportunity to request a few upgrades to every American’s favorite retirement vehicle, the trusty 401k. So here it is, my Election Year Retirement Plan Wishlist!

Make 401K’s Portable

For the life of me, I can’t figure out why my employer should be in charge of my retirement account. It’s my money, after all. Why can’t I invest it where I want? Oh sure, they may make matching contributions every once in a while, but does that give them the right to tell me which fat-cat mutual fund manager’s yacht I should pay the mortgage on? Why don’t I just let them choose my wife while they’re at it? This whole dating thing is a scam anyway. I would probably be much better off letting my employer control my personal finances anyway because I’m certain they have my best interests in mind. Just ask the guys at Wal-Mart.

But seriously, letting employers choose investment providers and options for employees is a recipe for disaster. Your employer has a far greater motivation to choose a plan that minimizes its own costs rather than choose a plan that would be most beneficial to you and your coworkers. The fact that the end customer (the employee) has no choice over investment options or even investment provider creates an artificial demand for crappy, expensive investment plan providers that give kickbacks to an uninvolved intermediary (your employer). That’s not what America needs. America needs a retirement plan marketplace where providers actually compete for your investment dollars (Imagine that! Capitalism in America! ) with lower costs, superior service, or both.

I propose we scrap the current system and make 401K accounts completely portable. Under the new system, you would choose your own provider be it Vanguard, Fidelity, Schwab, T Rowe Price, or whomever and provide every new employer with your account deposit information. It would work exactly like direct deposit: on a designated day, the money would be deposited directly into your account without you having to do a thing. Other than that, the switch would be completely seamless from the employee’s perspective. This simple change would lower costs and improve service as mutual fund companies are forced to compete for your business rather than operate as tiny monopolies. For investors without an existing 401K plan, the federal Thrift Savings Plan could be set up as the default plan, being an ideal option for beginners due to its line-up of broadly-diversified index funds with rock-bottom costs.

Eliminate The 401K Tax Deduction

Wait, it’s not what you think. Offering tax incentives to investors is a great way to encourage people to save for their future, but the current tax deduction situation is horribly slanted towards high-income individuals. An investor in the highest tax bracket saves $35 in taxes for every $100 saved in her 401K while the struggling single mother saves only $10 or $15 in taxes for every $100 saved. This has the insane result of offering the weakest incentive to save to the individual needing it most (the low-income single mother) and the greatest incentive to the person needing it least (the high-income earner). To add insult to injury, any poor individual who does manage to save and invest enough over their lives to retire relatively well off will probably be in a significantly higher tax bracket at retirement due to their large 401K distributions, practically eliminating any tax advantage that may have existed.

The solution is to elminate the income tax deduction in favor of a fixed tax credit applicable to everybody. The exact percentage doesn’t matter, but let’s say it’s 20%. Under this plan everybody, rich and poor alike, would save $20 in taxes for every $100 saved, increasing the tax savings of the low-income investor and decreasing that of the high-income investor. This seems much more fair and logical to me and is a change even a Republican could love.

Disclosure Of ALL Fund And Plan Fees

While mutual fund expense ratios are disclosed and easily identified, additional plan expenses such as administrative costs, overhead, and kickbacks to your HR department are not. They should be, though, because the money for these costs is coming out of your pocket. You don’t like it when your bank charges you random fees without even telling you, so why do you put up with it in your retirement plan?

Matching Contributions In Company Stock Should Be Illegal

Just ask anybody working at Enron a few years ago what kind of trouble you can get into when you own too much company stock. As a fiduciary, your employer is legally and morally obligated to look after your best interest without regard to personal profit. Matching employee contributions with company stock creates a situation where inexperienced investors often find themselves with a portfolio heavy in the stock of a single company. That’s the opposite of looking after your best interests and the practice should be eliminated. If an employer wants to match 401K contributions, they can do it in cash.