WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

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corp_sharecropper
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WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by corp_sharecropper »

The further & deeper I go into the rabbit hole of investing/saving for retirement, the more I find myself becoming irritated, at what appears to me, to be the illogical/absurd/arbitrary/punitive/tactless way in which the system as-a-whole, is setup & run.

Let's start with, what I presume is the purpose, especially based on there being a pretty good amount of consensus among both experts & the general population.

Purpose: We want people to save some money for retirement. We want people to do this because SS alone is meager and the costs/abilities for industry to run pensions has proven to be too difficult.

How (Part 1): We can't rely on people to just take money from their bank accounts and sock away cash or invest it. So we will incentivize this behavior by allowing them to do it with pre-tax money, and incentivize employers to facilitate this as well.

How (Part 2): We will make it such that the places where this money is invested is arbitrary, up to the choices decided upon by the employer & a financial institution. We will make it expensive; we will make many of the small investment choices expensive in terms of fees. We will make it highly variable; each employer will have it's own tens-of-pages rulebook for what is allowable with this, doesn't matter what is legally allowable in terms of investment choices, rolling in/out someone's own money, etc - nope, all these choices regarding an employee's own money shall be decided by the "plan". All these factors shall vary not just by which financial institution is managing the plan, but also between employers using the same institutions.

So my question is, why is it that the section "How (Part 2)" is part of the same system, as the plainly logical "How (Part 1)"?

Why is "How (Part 2), seemingly a 180 degree charge against (or at best an indifferent clumsy implementation of) the reasonable goals/purpose of even wanting people to save for retirement?

Why would we make something that could certainly be much easier and beneficial, so difficult, murky, and just bad?

In my mind, the rules and implementations are so bad, that there's even a faint stench of malice emanating from it because I can't come up with any other way to explain why it would be this way.

I am personally very fortunate to have a very good plan, compared to most. That said, I've had, or my wife has had, and I've seen, in the past, some plans that just make you want to shake your head in disgust and wonder how anyone could have thought it up.

That said, I freely admit I don't know even a fraction of what goes on at the financial institutions managing the plans, employers offering the plans, gov tax revenues, general population success/failure retiring with 401K's (is it still too early to know?). I'm hoping more expert people, possibly with views from inside these other involved parties, can help explain me to understand. Thanks.
Texanbybirth
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by Texanbybirth »

Well they are voluntary, so "employee's own money" doesn't have to be put into the "plan" to start with. Employee (and spouse) could open an IRA wherever if they wanted to avoid their plan. Of course, they'd miss out on any matching.

"Malice" is a strong word, though "greed" would probably work. :beer
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RandomWord
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by RandomWord »

My understanding is that the 401K system was never really "designed" at all. It was essentially a loophole that some clever accountants found in the tax code. The government allows it, since they do want to encourage retirement savings after all, but it has a lot of flaws that you point out. It could be made better, but it's good enough that there's no real political pressure to reform it.
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Watty
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by Watty »

corp_sharecropper wrote: Wed Dec 04, 2019 2:28 pm The further & deeper I go into the rabbit hole of investing/saving for retirement, the more I find myself becoming irritated, at what appears to me, to be the illogical/absurd/arbitrary/punitive/tactless way in which the system as-a-whole, is setup & run.
Part of the problem is that 401K's were more a less an inadvertent loophole that someone figured out would allow people to to tax deferred savings.

A quick google found this,
A BRIEF HISTORY OF THE 401(K)
Despite their popularity today, 401(k) plans were created almost by accident. It started when Congress passed the Revenue Act of 1978, which included a provision that was added to the Internal Revenue Code — Section 401(k) — that allowed employees to avoid being taxed on deferred compensation.

In 1980, benefits consultant Ted Benna referred to Section 401(k) while researching ways to design more tax-friendly retirement programs for a client. He came up with the idea to allow employees to save pre-tax money into a retirement plan while receiving an employer match. His client rejected the idea, so Benna’s own company,
https://www.northwesternmutual.com/life ... d-and-why/
livesoft
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by livesoft »

One has to understand how special interests, lobbyists, and politicians work. Once you understand that, then you know why many things are the way they are.
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Dottie57
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by Dottie57 »

For part 2 - there is a balance of the institution hold the 401ks needing to make money and employers wanting to limit costs.


The law creating 401ks only creates a. Container and rules to limit contributions. Who pays for costs and dollar matching is left to the free market.

I was lucky in that megacorp maintained and improved its 401k for the 21 yrs I worked there.
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firebirdparts
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by firebirdparts »

401K's were invented by Eastman Kodak as a way to defer executive compensation. They lobbied for it. Deals were made. Some kind person [see below Ted Benna] realized that the law didn't exclude ordinary people. Once there was one 401k existing, they proliferated. The laws associated with what you can and can't do were modified and adjusted. There was never any grandiose plan by the government to replace pensions with a 401k. That was just an accident. The government's plan was IRA's. You've noticed, I'm sure, that IRA's don't look much like a 401k.

Since then, 35 years of events shaped what people invest in, what the laws are, and what normal looks like. Investing now (as of 1 month ago) is pretty much free. But that's new. There seems to be now considerable danger of being sued for offering a high fee plan. If I were an employer I would be concerned about that. There have been several threads here about investment choices in these various accounts.

We have Fido and inside that I have a feature called "brokerage link". I can buy any mutual fund that fidelity offers, but only mutual funds. On the other hand, just this year they made us some custom funds-of-funds which I don't like and replaced some real funds that were in our 401k. I don't know why, but evidently somebody here did that. There is concern that "offering too many options" is bad for a plan. I like too many options myself.
Last edited by firebirdparts on Wed Dec 04, 2019 2:51 pm, edited 2 times in total.
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bradpevans
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by bradpevans »

You may find this interesting (or aggravating) https://www.youtube.com/watch?v=JhW0uXlOQJs

My recollection is that they could replace pensions. Pensions are both risk and record-keeping concerns for the megagcorp. The specific 401k options in a given plan may relate to the relationship between your employer and the brokerage house. 24 times per years huge amounts of money flow from the company i work to the brokerage house.

With matching and tax deferral it still is typically better than other options.
Topic Author
corp_sharecropper
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by corp_sharecropper »

Watty wrote: Wed Dec 04, 2019 2:37 pm
corp_sharecropper wrote: Wed Dec 04, 2019 2:28 pm The further & deeper I go into the rabbit hole of investing/saving for retirement, the more I find myself becoming irritated, at what appears to me, to be the illogical/absurd/arbitrary/punitive/tactless way in which the system as-a-whole, is setup & run.
Part of the problem is that 401K's were more a less an inadvertent loophole that someone figured out would allow people to to tax deferred savings.

A quick google found this,
A BRIEF HISTORY OF THE 401(K)
Despite their popularity today, 401(k) plans were created almost by accident. It started when Congress passed the Revenue Act of 1978, which included a provision that was added to the Internal Revenue Code — Section 401(k) — that allowed employees to avoid being taxed on deferred compensation.

In 1980, benefits consultant Ted Benna referred to Section 401(k) while researching ways to design more tax-friendly retirement programs for a client. He came up with the idea to allow employees to save pre-tax money into a retirement plan while receiving an employer match. His client rejected the idea, so Benna’s own company,
https://www.northwesternmutual.com/life ... d-and-why/
I've read about this. But as stated in your link, it took all of 2 years for the rules to become geared toward retirement saving for employees and not much longer, relative to the typical economically productive life span of a person, to be implemented as THE purpose for a massive amount of people.
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firebirdparts
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by firebirdparts »

P.S. I have no clue why there is matching, as I had nothing to do with it, but you've probably noticed that the employER contributions are:
1. Subject to really big $$$ limits, and
2. Eliminate or help you pass means testing by the government, and
C. Don't count against the empolyEE maximum.

So they do everybody good, and they especially do the executive team some good. That couldn't hurt.
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retire2022
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Re: WHY, exactly or generally, are 401K's designed/managed the way they are? (SPD, choices, matches, rules, etc...)

Post by retire2022 »

Op

On my wish list is they should get rid of Required Minimum Distributions (RMD) at 70.5, allow everyone to have Roth Accounts with the understanding this will save Social Security.

If the government will allow for mandatory savings for teens from age 14-24 of all earned income, they will not need Social Security

see this link https://www.daveramsey.com/blog/how-tee ... llionaires

55% of Americans or 160 million do not have any savings, if 70% of Americans are consumers providing the bulk of profit in the stock market can we at least agree there should be a system for 55% to be part of the middle class?
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