Time to make the 401k mandatory?

[haapai]

This article comes to you from Kiplinger via MSN Money. I have mixed emotions regarding the source, but think it's worth discussing. It's hard not to imagine how much our lady Liz could have added to the discussion with the specifics of participation rates and the costs associated with administering a 401(k) plan.

I think the basic premise is pretty sound. Pensions are gone and Social Security is not enough. A lot of people are failing to set aside anything close to what they for retirement and starting way too late. Unless we get those participation rates up, somehow, the ants are going to be subsidizing the grasshoppers.

articles.moneycentral.msn.com/Investing/MutualFunds/time-to-make-the-401k-mandatory.aspx

What he's suggesting would definitely boost participation and get a whole lot of people edumacated on retirement savings when they were much younger.

On the other hand, I think some of his suggestions are a bit naive. I'm particularly worried that employers with minimalist interpretations of fiduciary responsibility will opt for cheap-for-them third party administrators who offer awful, fee-ridden choices, especially in the life-cycle funds that the writer wants as the default option.

Your thoughts? In particular, do any of you have any idea what kind of fees third-party administrators are charging companies?

[NomoreDramaQ1015]

You are always going to have the people who do the bare minimum. As I have learned on YM, my 403(b) even with employer match is probably not going to be enough come retirement time, I need to do more if I want to have more than the bare minimum.

So making them mandatory makes people save something but it still probably will not be ENOUGH for a lot of people to keep them independent into old age. It'll just be the new social security for a lot of people.

I am cynical and don't believe that just because people are made to do something means they will magically spring into action. Most are happy to just coast by and will coast by this time counting on their employer matched 401(k) to get them to retirement and beyond.

[MN-Investor]

I originally saw this article in Kiplinger's Magazine. I agree with your concerns, but I have a different concern. My DH and I are very responsible and have contributed the maximum to our employers' 401(k) plans throughout the years. We look forward to managing our investments in our retirement. I find it abhorrent that we would be required to convert our savings into an annuity. We would never trust our life savings to some insurance company! What I would go along with is requiring companies to offer an annuity as an option at retirement.

[Urban Chicago]

I agree that we need to "encourage" people to save a lot more, but I'd like to see more options offered.

For example, a lot of people on the old boards preferred to buy rental real estate instead of investing in the markets. Maybe if you could provide documentation that you had X% of your salary in some kind of saving vehicle, you would be able to get out of the 401K?

[Savoir Faire-Demogague in NJ]

The federal govt has been trying to legislate and pass laws to eliminate irresponsibility and ignorance for a long time.
Look at the results.

[Deleted]

What happened to personal responsibility?

[thyme4change]

Maybe the annuity part could only apply to the legal min. So, if the legal min is 3% + 3%, but you contributed 15% and your employer contributed 6%, then 28.5% of your total funds would be paid in an annuity and 71.5% could be distributed at your discretion. However, I think a more appropriate "law" would be that you could only withdraw a certain percentage of your assets each year during retirement to prevent people from turning 65, pulling out the whole schebang and running to the Indian Casino and losing it all in one day.

Another provision I would like to see is if you can prove that you put 3% into an IRA you could opt out of the employer plan - in case their plan sucks.

But, yes, I would be really excited to see something like this. If someone started out at 18 years old making $20k per year, and increased their earnings by 3% every year, and put away 3% of theirs, plus 3% from the employer, they would have nearly $1M in the bank at 65 years old. That would give them nearly half of their last year's income coming from these investments. {{Enter a whole butt-load of variables here}}

I also wonder how many people would see the power of savings if they were forced to do it?

[Savoir Faire-Demogague in NJ]

Many individuals "cannot worry about 40 years from now".

[haapai]

I really hadn't considered the possibility that an employee making the minimum mandatory contribution, or whose employer was making such a contribution, would think that 2-5% was adequate. I'm pretty fixated on the value of making introducing 20-somethings to retirement savings and the best way to do that is to make sure that they have an account.

[haapai]

I don't like the as-an-annuity-only part either. But my concerns are more of the bad-actor variety. As proposed, you're pretty much stuck with the plan offered by your last employer, and that plan can charge whatever fees they choose.

There seems to be a perpetuity problem here too. What if the employer closes shop or ends the plan? What if the third-party administrator goes under. I'm not sure the anti-looting provisions that this guy proposes are worth the problems that they create.

[Savoir Faire-Demogague in NJ]

I would not worry about those who have nothing saved in a retirement account. The fed govt will be levying wealth taxes on those people(ie: middle class) who have ira's, 401k's, 403b's, etc. and using this revenue to fund retirement checks for those who saved nothing(and likely spent like drunken sailors their whole life).
A back door way to means test SS.

[thyme4change]

I've worked for 2 companies that closed up shop, but Fidelity still held our assets. As for third-party administrators going under - we have that risk now, don't we?

[haapai]

I'm not particularly concerned about their welfare, I'm concerned about having to pay for it. I want to trick em into saving something so that my future tax bills will be lower.

[Savoir Faire-Demogague in NJ]

I've worked for 2 companies that closed up shop, but Fidelity still held our assets. As for third-party administrators going under - we have that risk now, don't we?

There is no risk. Fidelity merely maintains the accounts. Your investments are in other companies, and other assets.
But if the financial firm goes bankrupt, any mutual fund that you own which holds that stock will have some losses, minute losses.

[haapai]

I think at present if the third-party administrator stuck with orphan 401(k)s (i.e. the company no longer exists or has ended the plan) wanted to close shop, the option of rolling over into an IRA exists.

[haapai]

I'm kinda surprised that Gen Y hasn't shown up yet to ask why they should be forced to contribute to a tax-deferred plan instead of a Roth.

[frep]

I think if you had mandatory 401k participation you would just see more people taking loans against them or just cashing them out and paying a lot penalties for money that they didn't want to contribute in the first place.

[haapai]

I think if you had mandatory 401k participation you would just see more people taking loans against them or just cashing them out and paying a lot penalties for money that they didn't want to contribute in the first place.

This proposal does not allow 401(k) loans, early distributions, or rollover into an IRA (from which early distributions could be taken).

[phil5185]

What happened to personal responsibility?

Those of us that were around in WW2 kept it for ourselves - LOL.

Most Fortune 500 employers made 401k's available in 1982 & 3. Even 10 yrs later, the % of employees participating was only in the 30% to 35% range (which always puzzled me, what were they thinking). By about 1995 most companies were phasing out the defined benefits pensions and putting that contribution money into a 401k 'match'. Most big companies now are 401k only, no pensions (I don't know where the writer found that 40% of companies still have pensions, sounds dated to me).

A few yrs ago congress was considering a plan where you were automatically enrolled in a 401k unless you made a conscious decision to opt out - I though it was now Law, anyone know?

I have both a pension & a 401k, the pension equation started phasing out about 8 yrs before I retired (1998) so I get about a half pension. But the 401k is way better - about a million in a 401k easily trumps a pension - if I had to give one up, I'd keep the 401k.

[Deleted]

Jan 13, 2011 17:21:39 GMT -5 thyme4change said:

However, I think a more appropriate "law" would be that you could only withdraw a certain percentage of your assets each year during retirement to prevent people from turning 65, pulling out the whole schebang and running to the Indian Casino and losing it all in one day.

So not only you want to force people to save, now you want to limit how much of that money they saved that they can take out?

Good luck!

[dancinmama]

Jan 13, 2011 17:33:27 GMT -5 Savoir Faire-Demogague in NJ said:

I would not worry about those who have nothing saved in a retirement account. The fed govt will be levying wealth taxes on those people(ie: middle class) who have ira's, 401k's, 403b's, etc. and using this revenue to fund retirement checks for those who saved nothing(and likely spent like drunken sailors their whole life).
A back door way to means test SS.

This scares the hell out of me. Our retirement money is split almost evenly between what DH will receive in pension and what we will draw from his 401k. In addition, we do have some cash and I have a small IRA; but the bulk is the pension and 401k. We worked our asses off for that 401k money. He earned the contributions and company match and I worked hard to grow it. I want the government to stay out of our knickers.

[haapai]

The problem with relying on personal responsibility is that it doesn't count for much if you're surrounded by people that don't have any.

Imagine for a moment that you work on the upper floor of a building serviced by a particularly unreliable elevator. You can easily get stuck in that elevator for hours. Consequently, you never get into that elevator without your cell phone, a box of granola bars, and an empty bladder. Sounds sensible, right?

If you ever find yourself stuck in that elevator for six hours with five other people who do not share your sense of personal responsibility, you really haven't saved yourself all that much misery. You might not have to share your cell with everyone else but you will probably have to share the snacks and the odds are good that all six of you will be bunched in one corner when the door finally opens.

[dancinmama]

Jan 13, 2011 18:31:40 GMT -5 phil5185 said:

What happened to personal responsibility?

I have both a pension & a 401k, the pension equation started phasing out about 8 yrs before I retired (1998) so I get about a half pension. But the 401k is way better - about a million in a 401k easily trumps a pension - if I had to give one up, I'd keep the 401k.

Me too, unless the government decides that it wants a big piece of it.

[Sum Dum Gai]

Personal responsibility through government mandate... yeah that sounds like it'll work...

[dancinmama]

Jan 13, 2011 19:29:38 GMT -5 haapai said:

The problem with relying on personal responsibility is that it doesn't count for much if you're surrounded by people that don't have any.

I TOTALLY agree. There are a ton of people out there who let year after year pass and although they know that they SHOULD be doing something, they do very little if anything at all to provide security for themselves in old age.

[MN-Investor]

"Me too, unless the government decides that it wants a big piece of it."

In exchange for growing tax free, your regular 401(k) and traditional IRA will be taxed at ordinary income rates. The government most certainly will get a piece of it. But everyone was told that upfront.

I'm more concerned about my Roth IRA and my DH's Roth 401(k). We have been told that they will be tax free. Will the government renege on that?

[Deleted]

Jan 13, 2011 19:42:19 GMT -5 MN-Investor said:

I'm more concerned about my Roth IRA and my DH's Roth 401(k). We have been told that they will be tax free. Will the government renege on that?

I am concerned about that too.
I have a feeling they will come out and say how they are missing out on $$$$ by not taxing them

[The J]

What I like is that 401(k)s can be made "opt out". I wouldn't have an issue with it being mandatory that 401(k)s are opt out.

[Deleted]

If we keep the same provisions we have now for withdrawals, there are still going to be people who withdraw it prematurely and pay the taxes and penalties. I've got a co-worker who immediately withdraws the 6% the company puts in our 401(k) every year over and above the match to our contributions. He's well below retirement age. I guess he figures that he still has money left over after the taxes are paid so it's all good.

At some point, we're trying to legislate against stupidity. Mostly it just ties the hands of people who behave responsibly.

[haapai]

I found the carrot part.

Companies and workers could both contribute more, with no limit.

That could be a heck of a boon to a small business owner. Tis hard to see how it furthers the cause of poverty reduction, though.