Frankenstein’s 401(k) Plan
“I beheld the wretch-the miserable monster whom I had created.” Frankenstein by Mary Shelley
The 401(k) industry has created a monster that’s devouring the retirement dreams of millions of Americans. Employees don’t value it as a benefit like health insurance or vacation time. The fees are high and hidden. The investments are sub-par and financial advice tends to be a sales pitch for other products.
So what would a 401(k) plan look like if it was truly a retirement plan, and not just a product sold by financial advisers?
My plan would look like this:
1. Automatic enrollment: Everyone is in the plan unless they opt out.
2. Target Date Default: Unless you take the extra step of opting out, you would automatically be invested in a low cost Target Date Fund based on your age.
3. Index funds only: Five target date funds and three or four other broad based index funds would be the only choices. Why make it more expensive and complicated than the law requires?
3. Automatic Escalation: Employee deferral rates would start at 4% and automatically rise by 2% each year until it tops out at 10%. Again people are free to opt out or contribute more or less if they wish.
4. Do away with Safe Harbor Matching: I’m a practical guy, and automatic enrollment could make matching contributions expensive. Besides, the dirty little secret in the 401(k) industry is that matching contributions don’t really have a huge impact on participant savings rates anyway. Auto enrollment and escalation will help the plan pass discrimination testing and with a little proactive help from a good record-keeper, the extra testing is not a big deal.
5. Optional Profit Sharing: Why should a company give everyone money towards retirement just for showing up? Tie optional 401(k) profit sharing contributions to company goals and turn company generosity into a meaningful benefit everyone works toward.
6. Provide Financial Education: Since we have created such a low cost, simple, 401(k) plan without an expensive match, the business owner can now afford to hire an independent financial planner to provide basic financial education (insurance, college planning, credit/debt counseling, estate planning) to the workforce. Just make sure that the adviser you hire does not get additional compensation for selling any of the financial products they are teaching about. The bottom line: No one does retirement planning in a bubble. We all have competing financial worries we need to address if we will ever be able to retire.
“But soon, I shall die, and what I now feel be no longer felt. Soon these burning miseries will be extinct.” Frankenstein by Mary Shelley.
We are all consumers in the 401(k) marketplace. Speak out! It is time to end Frankenstein’s 401(k) plan and design something better.