House 401(k) Hearing: 4 Ways to Fix the Retirement System

I'm a financial planner. First, understand the current structure and trends: Employer-sponsored defined benefit plans have been trailing off for years (expensive to maintain and longevity risk to the employer). Defined contribution (DC) plans seem to be the way to go; that said, there should remain flexibility in payouts (lump or stream).

Within the DC space, we have pretax vehicles (e.g., Traditional 401ks and IRAs) and aftertax vehicles (Roth-qualified accounts). Pretax accounts seem like a good idea (tax break now gives greater exposure the market, as long as it goes up) but they create additional complexity during the distribution phase of life, requiring income tax planning, RMDs, etc. Roth accounts are simplier: You save, it grows tax free and comes out tax free; no RMDs required.

IN MY OPINION: Employer-sponsered plans should be scrapped and a Universal Retirement Account (URA) should introduced. A URA would be like an Roth IRA with a larger contribution limit (amount to be determined). After providing employees the option to proactively set up contributions through payroll, employers would default to enrolling employees with, say, a 10% contribution; employees could still opt out. Employers would NOT be permited to contribute to such accounts. Any compensation (e.g., salary, bonus, "match", profit sharing, NQDC, everything) would be paid-out to employees and be taxed on the front end. Like IRAs, URAs would have no specific affiliation with their employer and could be transfered to the owner's custodian of choice at any time; no more trapping employees in plans with poor investment options. Before distributing funds, custodians would be required to provide owners information on annuitizing (some or all) versus withdrawing funds as needed.

Via the tax code, Congress needs to take a hard stance against employer-based benefits; they've gotten out of control (first was retirement benefits, then health insurance and it was opened so wide that it's referred to as "cafeteria plans"). Such a structure makes choosing an employer all that more important ("Well, do you have Flexible Spending Accounts for my kid's childcare and my family's out of pocket medical expenses and my parking or bus fare?"); health insurance already complicates the employer-employee relationship. Keep in mind the trend of employees more frequently switching employers; why not lower the barriers further by scrapping employee-retirement benefits and instead offer someting like a Universal Retirement Account.

Institutional asset managers would cringe at this idea because they generate a great deal of revenue from employer-sponsered plans; that revenue ultimately comes at the expense of the employees trapped in such plans. Give it back to the employees.

Radical change? Yes, but we would all benefit from the increased transparency and simplicity of this idea (this coming from a person who makes a living advising people on the complex system we live with today).

Brandon, CPA of OH 10:11AM April 01, 2009

A sure fire way to fix our retirement system is to put all the govn,t retirement systems in the social security program.that,s to include the prestigiouse house and senate retirement system in place that gives all representatives and senators a golden parachute.have you ever seen a poor government worker after he retired from a great govn,t job.we should all be so lucky.i,d also like to add ,the only citizens who survived a deppression well was the government workers.again we should all be so lucky.

wilfred martin of ME 6:53PM February 26, 2009

The federal government needs to stay away from my private 401K. They already control too much. The economy will get better over time and my 401K will grow again. Actually buying this low is only going to enhance my 401k in the future.

If people do not save it is their own problem. We can not be responsible for people who know they should plan and do not.

It is like the mortgage industry. Let them lose their houses. Why should I or anyone have to use our hard earned money on people who do not deserve it!!!

Melinda of MA 12:44PM February 25, 2009