Why must 401Ks be company specific?

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EdwardL007
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Why must 401Ks be company specific?

Post by EdwardL007 » Sat Aug 10, 2013 1:06 pm

Many companies offer plans that contain high fees and limited choices. Why can't company and employee contributions all be made to an employee's individual account - call it what you will, IRA, etc. - and then they can have the full range of investment choices and can choose limited fee options? No more rollovers, etc. Is it because the special interest financial industry wants it that way?

Tom_T
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Re: Why must 401Ks be company specific?

Post by Tom_T » Sat Aug 10, 2013 1:49 pm

EdwardL007 wrote:Many companies offer plans that contain high fees and limited choices. Why can't company and employee contributions all be made to an employee's individual account - call it what you will, IRA, etc. - and then they can have the full range of investment choices and can choose limited fee options? No more rollovers, etc. Is it because the special interest financial industry wants it that way?
It would be complicated. A company would have to send money to who-knows how many different places. Sounds like a nightmare for the payroll department and/or ADP -- even when done electronically.

CaveatEmptor
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Re: Why must 401Ks be company specific?

Post by CaveatEmptor » Sat Aug 10, 2013 2:02 pm

Tom_T wrote: It would be complicated. A company would have to send money to who-knows how many different places. Sounds like a nightmare for the payroll department and/or ADP -- even when done electronically.
Employers already transfer employee paychecks to "who-knows how many different places", and it would be easy for them to do the same for retirement contributions to an (e.g.) super-IRA that would replace the current wretched 401k system.
Last edited by CaveatEmptor on Sat Aug 10, 2013 4:23 pm, edited 1 time in total.

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Re: Why must 401Ks be company specific?

Post by nisiprius » Sat Aug 10, 2013 2:02 pm

It's a pure random accident of history, rather like "why do so many Americans get their health insurance through their employers." They weren't rationally designed. It's not as if Congress or anyone else started from zero and asked "how can we best create an individually-funded retirement savings plan?"

401(k)'s are named after a portion of the tax code. It was not intended to be a retirement savings plan for midlevel workers; it was intended to be a tax break for high-level employees who got deferred compensation. A benefits consultant saw that it could be repurposed, and started marketing it to clients as a general-purpose retirement plan. Companies that wished to offer some kind of "retirement plan" liked them because they were easier, cheaper, and involved less company responsibility than traditional pensions.

And of course all along the way, the people involved in 401(k) plans as they exist have had a vested interest in keeping things the way they are.

But then, so many things are pure random accidents of history, that get popular, spread, and get locked in.
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Re: Why must 401Ks be company specific?

Post by lawman3966 » Sat Aug 10, 2013 2:44 pm

There was a suggestion, from Paul Volcker I believe, to raise the deductible IRA contribution limit to approach the level of deductible 401K contributions. This would, in effect, then be a personal 401K. However, the 401K industry put a stop to that.

The best 401K investors can do under these circumstances is to get their fees as low as possible, take advantage of Rollover opportunities when they become available, and avoid incurring any fees in addition to the mandatory ones imposed by their own plan.

After conducting several rollovers arising from various job changes, I now have the vast majority of my retirement assets outside the realm of high-fee 401K plans.

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Re: Why must 401Ks be company specific?

Post by curtin1060 » Sat Aug 10, 2013 3:09 pm

Sorry, I was thinking why can't a company just select a Dealer/Broker and allow you to pick and choose whatever that D/B offers ?

My company uses Fidelity, and we have a selection of ~12-15 funds (Vanguard, pimco, Blackrock, i forget the others)

Why can't the 401K allow me in any fund carried by Fidelity (yes, I'd then have to pick up the transaction fee if applicable) ?

I mean, I'm already paying fees on some of my fund selections.

dbr
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Re: Why must 401Ks be company specific?

Post by dbr » Sat Aug 10, 2013 3:11 pm

curtin1060 wrote:Sorry, I was thinking why can't a company just select a Dealer/Broker and allow you to pick and choose whatever that D/B offers ?

My company uses Fidelity, and we have a selection of ~12-15 funds (Vanguard, pimco, Blackrock, i forget the others)

Why can't the 401K allow me in any fund carried by Fidelity (yes, I'd then have to pick up the transaction fee if applicable) ?

I mean, I'm already paying fees on some of my fund selections.

Companies can and do. The program is usually called a Directed Brokerage Option or something of a similar nature. Aside from the stable value fund provided in my 401K all my 401K assets are in Vanguard funds or ETFs at the broker designated by the plan.

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Re: Why must 401Ks be company specific?

Post by manwithnoname » Sat Aug 10, 2013 3:30 pm

dbr wrote:
curtin1060 wrote:Sorry, I was thinking why can't a company just select a Dealer/Broker and allow you to pick and choose whatever that D/B offers ?

My company uses Fidelity, and we have a selection of ~12-15 funds (Vanguard, pimco, Blackrock, i forget the others)

Why can't the 401K allow me in any fund carried by Fidelity (yes, I'd then have to pick up the transaction fee if applicable) ?

I mean, I'm already paying fees on some of my fund selections.

Companies can and do. The program is usually called a Directed Brokerage Option or something of a similar nature. Aside from the stable value fund provided in my 401K all my 401K assets are in Vanguard funds or ETFs at the broker designated by the plan.
Brokerage accounts cost extra to administer and the profits go to the brokerage that administers the account not to the provider of the core funds. Some employers do not want to deal with the hassles of brokerage accounts such as preventing prohibited transactions, reporting, limiting some funds to employees who are accredited investors, etc and dealing with employees who make stupid investments such as Nigerian gold funds and hedge funds. What make you think that fido would want to make every one its funds available to an employer plan? The admin costs to Fido would be too steep to be profitable.

Some employers/fiduciaries think that allowing employees to self direct into brokerage accounts is imprudent because employees will over concentrate in a single investment or sector instead of diversifying investments. If you want to self direct you can do it in an IRA.

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Re: Why must 401Ks be company specific?

Post by jegallup » Sat Aug 10, 2013 3:45 pm

Before my former company got "large" enough (10 employees or so) to make a 401(k) plan worth the overhead expenses, we had a Simplified Employee Pension Individual Retirement Account (SEP-IRA) plan, under which the employer made direct contributions to the IRA of each employee's choosing. It was very simple for such a small number of employees, with minimal or no reporting to the Feds. The downside from the employee's point of view was that he or she could not add additional (sheltered) funds to the account. The downside for the employer/owner was that I couldn't shelter the larger amounts of income a 401(k) plan would allow.

So such plans do exist; they're just not as advantageous to either party as 401(k) plans. Another excellent program allowing employer and employee contributions is called "Social Security." Some here may be familiar with it. ;-)

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Re: Why must 401Ks be company specific?

Post by ruralavalon » Sat Aug 10, 2013 6:09 pm

nisiprius wrote:It's a pure random accident of history, rather like "why do so many Americans get their health insurance through their employers." They weren't rationally designed. It's not as if Congress or anyone else started from zero and asked "how can we best create an individually-funded retirement savings plan?"

401(k)'s are named after a portion of the tax code. It was not intended to be a retirement savings plan for midlevel workers; it was intended to be a tax break for high-level employees who got deferred compensation. A benefits consultant saw that it could be repurposed, and started marketing it to clients as a general-purpose retirement plan. Companies that wished to offer some kind of "retirement plan" liked them because they were easier, cheaper, and involved less company responsibility than traditional pensions.

And of course all along the way, the people involved in 401(k) plans as they exist have had a vested interest in keeping things the way they are.

But then, so many things are pure random accidents of history, that get popular, spread, and get locked in.
Odd history.

(1) Pre-1978, was a savings/thrift plan idea.

(2) Section 401k, created 1978, provided tax deferral for income employees elect to recieve as deferred compensation.

(3) In 1982 IRS regs endorse salarly reductions as a source for retirement plan contributions, and employers start to shift from old non-deducitible thrift plans to tax-deferred 401ks.

(4) Quickly (1984) Congress added "non-discrimination" provisions intended to keep 401ks from being a benefit only for the high earners in the company.

EBRI, "History of 401(k) Plans: An Update" .
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Re: Why must 401Ks be company specific?

Post by umfundi » Sat Aug 10, 2013 7:17 pm

The short (historical) answer is that in the USA labor unions went after companies for benefits like pensions and health insurance. In Europe, they went after governments, perhaps because of the level of nationalized (government-owned) industries due to the two World Wars.

So, in the USA, companies are the expected providers. It is natural that there will be differences, because of a resistance to commonality that can only be imposed by government.

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Re: Why must 401Ks be company specific?

Post by 3CT_Paddler » Sat Aug 10, 2013 7:24 pm

Such a system would be much better than the current one.

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Re: Why must 401Ks be company specific?

Post by umfundi » Sat Aug 10, 2013 8:24 pm

3CT_Paddler wrote:Such a system would be much better than the current one.
Maybe, but that's a question of political will.

The Canadians and the British would not exchange their health care systems with the USA. And, vice-versa.

I doubt the Australians would exchange their retirement savings system for that of the USA.

I am not trying to make any point here, other than that other countries have histories that have led them to different solutions than we have.

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Re: Why must 401Ks be company specific?

Post by cbeck » Sat Aug 10, 2013 10:19 pm

umfundi wrote:The short (historical) answer is that in the USA labor unions went after companies for benefits like pensions and health insurance. In Europe, they went after governments, perhaps because of the level of nationalized (government-owned) industries due to the two World Wars.

So, in the USA, companies are the expected providers. It is natural that there will be differences, because of a resistance to commonality that can only be imposed by government.

Keith
But the 401k was originally a tax-deferred savings plan for highly compensated employees only, not for the rank-and-file at all.

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Re: Why must 401Ks be company specific?

Post by umfundi » Sat Aug 10, 2013 10:36 pm

cbeck wrote:
umfundi wrote:The short (historical) answer is that in the USA labor unions went after companies for benefits like pensions and health insurance. In Europe, they went after governments, perhaps because of the level of nationalized (government-owned) industries due to the two World Wars.

So, in the USA, companies are the expected providers. It is natural that there will be differences, because of a resistance to commonality that can only be imposed by government.

Keith
But the 401k was originally a tax-deferred savings plan for highly compensated employees only, not for the rank-and-file at all.
Yes, until the loopholes were exploited for other employees and now defined benefit plans have collapsed and 401k's have come to be (by accident) the USA's individual retirement savings system.

Again, I think I am making an historical, and not a political, point.

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Re: Why must 401Ks be company specific?

Post by joe8d » Sat Aug 10, 2013 10:38 pm

Is it because the special interest financial industry wants it that way?
Not hard to figure the answer to that.
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Re: Why must 401Ks be company specific?

Post by manwithnoname » Sat Aug 10, 2013 11:22 pm

cbeck wrote:
umfundi wrote:The short (historical) answer is that in the USA labor unions went after companies for benefits like pensions and health insurance. In Europe, they went after governments, perhaps because of the level of nationalized (government-owned) industries due to the two World Wars.

So, in the USA, companies are the expected providers. It is natural that there will be differences, because of a resistance to commonality that can only be imposed by government.

Keith
But the 401k was originally a tax-deferred savings plan for highly compensated employees only, not for the rank-and-file at all.
Where did you ever get the Idea that 401k were only supposed to benefit HCES? Or are you confusing 401k plans with executive compensation?

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Re: Why must 401Ks be company specific?

Post by simpleton » Sat Aug 10, 2013 11:26 pm

This drives me absolutely batty. I hate that the government is dangling this juicy 401(k) carrot in front of me, and I've got to go beg my CFO to dump John Hancock as our provider in order for those tax incentives to be worth a damn.

I can think of three better options:

1) Allow employees to shop for the 401(k) plan they want to participate in. Let Vanguard, Fidelity and the rest set up their own 401(k) plans open to everybody. I can get my paycheck direct deposited into any bank I want. Why shouldn't the same be true for my 401(k) contributions? (Although the recent trend of low-wage workers having their salary paid using high-fee prepaid debit cards seems to be a case of this hypothetical running in reverse: http://www.nytimes.com/2013/07/01/busin ... wanted=all)

2) Have an "open un-enrollment" window every few years. If an employee is not happy with the services of their 401(k), let them roll over everything to an IRA without having to quit their job first.

3) Let employees or plan sponsors buy into the TSP. If it's good enough for federal employes, why can't the rest of us take advantage?

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Re: Why must 401Ks be company specific?

Post by umfundi » Sat Aug 10, 2013 11:55 pm

manwithnoname wrote:Where did you ever get the Idea that 401k were only supposed to benefit HCES? Or are you confusing 401k plans with executive compensation?
In 1978, when 401ks were legislated for deferred compensation, deferred compensation was usually only granted to highly paid executives. An astute person, Ted Benna, noted that this provision could be used by any employee to defer taxes on some of their compensation.

Thus, the accidental USA current retirement savings system.

Keith
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Re: Why must 401Ks be company specific?

Post by CantPassAgain » Sun Aug 11, 2013 9:53 am

simpleton wrote:This drives me absolutely batty. I hate that the government is dangling this juicy 401(k) carrot in front of me, and I've got to go beg my CFO to dump John Hancock as our provider in order for those tax incentives to be worth a damn.

I can think of three better options:

1) Allow employees to shop for the 401(k) plan they want to participate in. Let Vanguard, Fidelity and the rest set up their own 401(k) plans open to everybody. I can get my paycheck direct deposited into any bank I want. Why shouldn't the same be true for my 401(k) contributions? (Although the recent trend of low-wage workers having their salary paid using high-fee prepaid debit cards seems to be a case of this hypothetical running in reverse: http://www.nytimes.com/2013/07/01/busin ... wanted=all)

2) Have an "open un-enrollment" window every few years. If an employee is not happy with the services of their 401(k), let them roll over everything to an IRA without having to quit their job first.

3) Let employees or plan sponsors buy into the TSP. If it's good enough for federal employes, why can't the rest of us take advantage?
Or, just raise the tax advantaged retirement contribution limit to a total of $23,000 a year for any combination of roth, traditional IRA, or 401K.

Simple.

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Re: Why must 401Ks be company specific?

Post by umfundi » Sun Aug 11, 2013 12:06 pm

Strevlac wrote:Or, just raise the tax advantaged retirement contribution limit to a total of $23,000 a year for any combination of roth, traditional IRA, or 401K.

Simple.
Yes. I thought of simply quadrupling the IRA limits.

With 40(k)s there is the issue of employer contributions. Some employers make none, some make matching contributions, and some make contributions as a sort of DC pension plan, in lieu of the DB plans they no longer have.

While we're redesigning the system, how about a rollover option to an annuity (SPIA) with much higher guaranty amounts and conditions that do not vary by state?

Keith
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Re: Why must 401Ks be company specific?

Post by gkaplan » Sun Aug 11, 2013 12:16 pm

umfundi wrote:
Strevlac wrote:Or, just raise the tax advantaged retirement contribution limit to a total of $23,000 a year for any combination of roth, traditional IRA, or 401K.

Simple.
Yes. I thought of simply quadrupling the IRA limits.

With 40(k)s there is the issue of employer contributions. Some employers make none, some make matching contributions, and some make contributions as a sort of DC pension plan, in lieu of the DB plans they no longer have.

Keith
Since the current IRA contribution limit is $6,500 (including catchup) and the current 401(k) contribution limit is $23,000 (including catchup), I think they should raise the limit to a total of $29,500.
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Re: Why must 401Ks be company specific?

Post by Beagler » Sun Aug 11, 2013 4:04 pm

gkaplan wrote:
umfundi wrote:
Strevlac wrote:Or, just raise the tax advantaged retirement contribution limit to a total of $23,000 a year for any combination of roth, traditional IRA, or 401K.

Simple.
Yes. I thought of simply quadrupling the IRA limits.

With 40(k)s there is the issue of employer contributions. Some employers make none, some make matching contributions, and some make contributions as a sort of DC pension plan, in lieu of the DB plans they no longer have.

Keith
Since the current IRA contribution limit is $6,500 (including catchup) and the current 401(k) contribution limit is $23,000 (including catchup), I think they should raise the limit to a total of $29,500.
Great point. Think of the fees that investors would save by eschewing the high-fee plans at workplaces and shifting to VG? :happy
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Re: Why must 401Ks be company specific?

Post by manwithnoname » Sun Aug 11, 2013 10:43 pm

gkaplan wrote:
umfundi wrote:
Strevlac wrote:Or, just raise the tax advantaged retirement contribution limit to a total of $23,000 a year for any combination of roth, traditional IRA, or 401K.

Simple.
Yes. I thought of simply quadrupling the IRA limits.

With 40(k)s there is the issue of employer contributions. Some employers make none, some make matching contributions, and some make contributions as a sort of DC pension plan, in lieu of the DB plans they no longer have.

Keith
Since the current IRA contribution limit is $6,500 (including catchup) and the current 401(k) contribution limit is $23,000 (including catchup), I think they should raise the limit to a total of $29,500.
[Proposed legislation comment and associated article link removed by admin LadyGeek]

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Re: Why must 401Ks be company specific?

Post by chipmonk » Sun Aug 11, 2013 11:54 pm

manwithnoname wrote:[Proposed legislation comment removed by admin LadyGeek]
Really? That would be an incredibly regressive policy!!!

For me, or anyone else else who makes more than $87.5k, that would actually be an increase allowed 401k contributions, above the current $17.5k. But for someone making only $50k, that would reduce their potential yearly tax-advantaged 401k savings from $17.5k to $10k. :(

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Re: Why must 401Ks be company specific?

Post by avalpert » Mon Aug 12, 2013 8:58 am

chipmonk wrote:
manwithnoname wrote:[Proposed legislation comment removed by admin LadyGeek]
Really? That would be an incredibly regressive policy!!!

For me, or anyone else else who makes more than $87.5k, that would actually be an increase allowed 401k contributions, above the current $17.5k. But for someone making only $50k, that would reduce their potential yearly tax-advantaged 401k savings from $17.5k to $10k. :(
[Response to proposed legislation comment removed by admin LadyGeek] The result is theoretically regressive, but in practice it will likely hit higher income folks more (given current contributions) and of course any tax benefit that is provided as a reduction in Income is regressive in a system with progressive rates.

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Re: Why must 401Ks be company specific?

Post by meowcat » Mon Aug 12, 2013 10:13 am

Strevlac wrote: Or, just raise the tax advantaged retirement contribution limit to a total of $23,000 a year for any combination of roth, traditional IRA, or 401K.

Simple.
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Re: Why must 401Ks be company specific?

Post by LadyGeek » Mon Aug 12, 2013 3:42 pm

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