The U.S. retirement system is far from perfect. However, there are a few simple ways that retirement accounts could be greatly improved. Here are four fixes that would give all of us a better chance at a comfortable retirement.
Reduce the options. Investors have an intimidating amount of retirement account choices, each with different rules. While traditional 401(k)s and IRAs are the most common, there are also Roth IRAs, Rollover IRAs, SEP IRAs, Individual 401(k)s, and Simple 401(k)s. Who can actually keep the facts straight? Every time I call customer support about the different options available, everyone seems to give me conflicting advice about the accounts. It would helpful if the government could simplify all the retirement account choices. When the options are simple and everything is clear-cut, the only way companies can gain our business is to offer better terms that actually matter to us.
Low cost choices. Contributing to a traditional IRA is sometimes cited as a better strategy than putting money in a 401(k) because you have access to just about any type of investment and can shop around for the lowest fees. Why can't 401(k)s have the same choices or be required to offer affordable options such as low cost index funds? When you have access to fee information, it’s easier to pick cost-effective investments.
Independent investment education. In our do-it-yourself retirement system, it is essential that everyone be educated about investing their own money. But many people continue to make very basic investment mistakes. Many employers offer 401(k) education seminars, but these courses are often short and instructed by the company administering your 401(k). We need to learn the investment basics from someone not trying to sell us something.
Don’t allow early withdrawals. The 10 percent early withdrawal penalty has not deterred all investors from raiding their retirement accounts before retirement. There are also a variety of ways to avoid the penalty altogether. The ability to take early withdraws and loans from retirement accounts allows many people to get themselves into a bad position come retirement time. The money in retirement accounts should be used only to finance retirement.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.