Time to make the 401k mandatory?

[cronewitch]

I like my freedom and don't want them to be involved except perhaps to require employers with more than 50 employees to offer a plan with a high limit. Our company has a plan with only 10-15 people eligible to contribute and it cost the company nothing but my time to withhold and submit the money we don't have a match. We do put in a profit sharing about 1/4th of the time but it is nice for those who want to contribute. We have 3 employees under 50 who don't put in much 2 nothing, one 25 a week. The one with 25 was widowed in November at 46 years old after years of huge medical bills for the wife. Now he collected the life insurance and doesn't need 24/7 caregivers anymore. I told him this week it was a good time to increase the contributions being a new year. He will see his accountant and she will tell him what to have withheld for taxes and 401K. She told him before to save but he really couldn't trying to keep his wife alive. He spend all his home equity but has a cheap tiny house and is alone now with a good job, he had savings before and equity and I think he will save again so I pushed a little. The two with nothing are 32 and 35 single mothers the older just had two babies with a boyfriend but at least he is around. The 32 year old took all her money out to pay for drug rehab so can't put in for a year.

[bean29]

I read the link. While I agree that a lot of people need to contribute more to their 401K, some people are living so close to the edge, even $10-20 a week is probably more than they can afford.

Another thing, I think it is a horrible idea to say we are converting your $$ into an annuity. My parents are lucky and they are collecting SS, Pension, and have some 401K savings. The house had to be modified or dad would have been forced to go to assisted living or a nursing home. Modifications to the house easily topped $20,000 and were drawn from the 401K savings. It counts as Medicare spend down. If the $$ in your 401K are an annuity how would that affect the spend down - Medicare still gets it but only as it is allowed to be paid out?

Crone, I agree with you, I am also document the 401K contributions and remit to the trustee bank. Most of our people over 50 are doing at least 10% many of them are maxing out their contributions. I have one employee who is about 30, eligible to participate and does not. If he put in 5% he would earn a 4% match. I resent out forms to everyone in January and asked if they wanted to put their 2% SS reduction in the 401K. I had about 1/3 say yes. 1/3 are already maxing or have enough savings and the other 1/3 will be living on a prayer for the rest of their lives.

I like the idea of no withdrawals except in the case of disability or maybe a medical emergency.

I have to admit I am now sorry for 2 stupid things I did in my younger days. 1) pulled money out of 401 K to buy a house and paid a penalty and 2) Left one company like 1 month short of my vesting date. I worked in accounting, had just graduated from college and was focused on my new career. One employee pulled me aside and tried to tell me the mistake I was making but I was 25 and did not get it. One thing I did not understand was my new employer would have waited a few weeks and my old one would have let me stay until I vested too. Dumb, Dumb, Dumb.

[Deleted]

We have a variation of this with our teacher pension fund. We are automatically required to contribute 5%. You can't opt out. You can't withdraw your contribution unless you quit working. You are vested at 10 years and cannot withdraw at all. No loans, etc.

The major difference is that it is a defined benefit with no real contribution from the state until they have to pay out. In good years the state contributed $0. Now they have to pay in bad year and want to change it. There is talk of a 401k-type instrument and other "improvements."

I would be grandfathered for most of the pension plan's provision so I don't follow it very closely. But it is very similar to an annuity if you think about it. But we do have the option of contributing to a Roth (if your income is low enough) and an unmatched 403b, annuity, or other deferred retirement option as well.

[Savoir Faire-Demogague in NJ]

Jan 13, 2011 21:00:12 GMT -5 haapai said:

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.

I believe small business owners, typically those who work alone or independents, have numerous other options for retirment savings and they can put away 10s of thousands more.

[Deleted]

Jan 14, 2011 15:51:33 GMT -5 bean29 said:

Another thing, I think it is a horrible idea to say we are converting your $$ into an annuity.

Yeah, I'd have a big problem with that, too. Annuities have a big expense component built in and some have bewildering investment and mortality components, too. (Even as an actuary I'd find it hard to evaluate them.) Typically, annuities are purchased by people who expect to live longer than average. It would be cruel to force someone with a multitude of chronic health problems and maybe a couple of years to live, to buy an annuity.

I don't find that article very credible. First, they refer twice to money taken out of 401(k)s as "withdrawls". It's withdrawals! Second, they refer to 401(k) plans being "created". Actually, they were an accident. Some smart benefits person realized that Section 401(k) of the IRS Code allowed you to defer compensation till after you retired and avoid taxation in the year you earned it. It was hardly something the government set up to help us save for retirement- more of a private enterprise solution.

[cronewitch]

Some retired people want to take out different amounts in different years. I plan to take out some right after retirement so when I get to RMD it isn't too much for tax planning. Some might want to take a lot younger to travel or because they know they will get a large inheritance in a few years, plan to sell the house and spend the equity or some other plan even if they don't plan to die young. Some might have a money tied up in rental houses they plan to sell when they get too old to maintain them or a business they plan to sell when they don't want to work.

Forcing people who have a plan to fund retirement to get annuity payments instead of access to their life saving because other are fools is wrong. Some people don't need to save for retirement at all. One man at work has family trust and his dad died and his estate now has a trust. The estate and family trust each get dividends from our company, his grandfather was a founder of the company. He runs the company pretty much as a VP and will have two kids in college soon. He makes a nice salary but saves nothing in the 401K but got a nice new car since his son took his old car to college. They vacation, ski and do other expensive things and save nothing but with all the trust funds getting huge dividend checks I am not worried about him.

[Savoir Faire-Demogague in NJ]

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.


This will be a boon to people who have some sense of self responsibility.
People who need a brand new car every year, or need a complete replacement of their wardrobe every other year, or need an annual expensive vacation, will not be the ones who fit the profile of maxing out retirement plans.

Personally, on my end, I contribute the max of $22K to my 401K. I am over 50 and can participate in catch-up contributions. I would love to be able to contribute more but cannot. Having the tax deferral provides me with roughly a 28% return the first year due to tax deferrals. Alternatively I invest outside tax deferred retirement plans.

Elimination of and/or reducing poverty never entered into my mind.

[haapai]

"No limits" makes it really, really easy to make windfalls that would otherwise trigger some whopping tax bills disappear. Think about the winding down of a small business. What's to stop the business entity from paying their only remaining employee (the owner) enough to bring the books to zero? The employee/owner can then turn around and stuff (almost all of) that six or seven figure amount into a 401(k). (There might be a little bit of FICA and Medicare which would effectively be taxed as ordinary income, but not much.)

I'm weak on the AMT and MAGIs that only affect people who make exponentially more than me, so the odds are good that I have missed something that would prevent this from working.

[Savoir Faire-Demogague in NJ]

"No limits" makes it really, really easy to make windfall that would otherwise trigger some whopping tax bills disappear.

This is done now. I regularly have capital losses each year due solely to routine investment buy/sell transactions. My annual investment advisory management fees are paid by selling some investments. The management firm always manages to sell shares that are in a loss position, and as a result move to my tax return as a loss.

Keeping capital in the private sector is what reduces poverty.

With respect to the AMT, this tax hits millions of unsuspecting middle class tax payers every year.

[haapai]

Forcing folks to take withdrawals as an annuity (no cost component, but it has to last until you're XX) could have a toxic effect on voluntary contributions. I don't think folks in their 50s who are nervous about being able to work until 65 would want to lock away that money. The odds are just too good that they'll need that money earlier for health insurance or to keep them going until Social Security kicks in.

[haapai]

After sleeping on this proposal a couple of times, it occurs to me that it could be called Social Security, Take II.

This time it's invested. Benefits are not progressive relative to contributions. The leftover amount goes to your heirs instead of into the communal kitty.

[stillontheroad]

I commented on the article at MSN, but I'll copy and paste:

The only recommendations I agree with are requiring that employees be instantly 100% vested and requiring that unless someone specifies otherwise, the money deposited should go to a target-date fund. The other recommendations are terrible.

Coverage: requiring every single employer to offer a 401k plan for every employee is a bad idea because it's not feasible for the smallest of businesses, not to mention that it's not really appropriate to expect that part-time workers would get a 401k. I think requiring employers with more than, say, 100 employees to offer a 401k plan is possibly reasonable, but that would be way too onerous for someone employing a handful of people.

Funding: requiring every employer to match funds would be a big burden and probably result in more unemployment. Requiring every employee to contribute is a better idea, but there are cases in which contributing to a 401k isn't ideal. If I'm a college student working full-time but studying for a lucrative career, I might decide to put everything in a Roth IRA for now since later on I'll be in a higher tax bracket and unable to contribute to one. Furthermore, some 401k plans have terrible offerings (bad funds with loads and administrative fees) and in extreme cases it might be better not to contribute to them at all.

Early withdrawals: first off, where the heck are they getting age 65 from? Currently you can withdraw from your 401k starting at 59.5 and that already makes 401ks less attractive for some early retirees. Changing that age to be even higher is a dumb idea. Second, I don't like the idea of making it totally impossible to withdraw 401k funds early. Yes, it's generally a bad idea to do so, but that's why there are significant penalties.

Income stream: this is perhaps the worst proposal of all. It's my money, and you're going to tell me that I have to take it as an annuity rather than having full access to it when I retire? That's one of the dumbest ideas I've ever heard.

This will be a boon to people who have some sense of self responsibility.
People who need a brand new car every year, or need a complete replacement of their wardrobe every other year, or need an annual expensive vacation, will not be the ones who fit the profile of maxing out retirement plans.

I'm not necessarily opposed to raising the cap on 401k contributions, but let's get real: there are plenty of people who don't even need to contribute the current maximum to retirement accounts to be responsible. Let's say you make $60k a year (which is a low salary on this board, but represents one that's considerably higher than average in this country). Maxing out your 401k and Roth IRA would be $20.5k a year, or just over 34% of your gross. I don't know of any retirement savings formula that considers saving 34% of your gross to be inadequate (unless your goal is to retire really, really early).

[whoisjohngalt]

I must be the only one who is sick and tired of "mandatory". People need to grow the heck up and stop expecting hand-holding at every turn. You don't want to save for retirement? No problemo, just know that being homeless on the streets can be in your future.

Under this "humanitarian" umbrella we completely lost any sense of personal responsibility and accountability. When will it ever stop?

Lena

[Savoir Faire-Demogague in NJ]

When will it ever stop?

I guess you want to mandate that it stop???

[Deleted]

Jan 18, 2011 17:31:09 GMT -5 whoisjohngalt said:

Under this "humanitarian" umbrella we completely lost any sense of personal responsibility and accountability. When will it ever stop?
Lena

Lena-

I feel your pain, but the problem is that when people aren't responsible and the results of their bad decisions come home to roost, we as a society end up having to deal with it. We can choose not to deal with it, of course. That means that the elderly may die homeless in the streets or children may develop irreversible developmental problems due to poor nutrition. I don't like being stuck with the bills for my own insurance, retirement, food, etc. as well as the bills for those who cannot/will not provide for themselves- but what's the humane answer? Personally, I'm not against bringing back orphanages and workhouses. Seriously. You have kids you can't afford, well, the state will take over. You will not be rewarded with higher welfare payments and more food stamps.

[whoisjohngalt]

I guess you want to mandate that it stop???

You got it. I want to mandate to stop the help for irresponsible and lazy. Abso-freaking-lutely!!

Athena,

None of MY answers will be humane enough. May be bc I come from a completely different background, may be bc I am too angry and resentful of my IL's - I don't know. All I know is I see plenty of hard working, "middle" class people being taxed every time they turn, so we "humanly" take care of anyone and everyone, legal or not, able-bodied or not, just bc no one has the guts to say "enough is enough"

Lena

[cronewitch]

We need to offer something to those who can't take care of themselves. Make them prove it and not something they desire.

Take disabled people, some are unable to work or even keep themselves clean. Most were born into families who care able them and will take care of them if the government pays them or not.

If the families can't take care of them they should be put into humane settings where they are given food, clothing, shelter, medical care and physical help as needed. Group homes or nursing home if needed.

I only resent those who choose to be bums and don't even try to support themselves and their children.

[formerexpat]

I'd prefer that my government focus on responsibility with our collective tax dollars first. Once they can walk the walk, then they can talk the talk.