Problems And (Proposed) Solutions For 401k Plan

The 401k plan has been under a great deal of scrutiny lately, with quite a few proposals being offered to “fix” the system. Granted there are a few problems with the system that is in place, but the overall concept is still good. What follows is strictly my opinion of some of the real “problems” followed by a look at the presently proposed solutions that are being dallied about.

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The Problems With 401k Plan

Note: for the purpose of this discussion (and most discussions here) the term 401k is used to refer to all CODA (Cash Or Deferred Arrangements) such as 403b, 457, etc.. In my opinion all these plans should be treated equally.

Problem: To start with, it makes so very little sense to strictly tie the plan to the employer. Of course, this made a lot of sense when employer matches could be solely in company stock (a la Enron), but these days the whole concept is outdated.

Solution: Do away with the present system of tying the plan to the employer.  Instead, simply increase the annual limits on IRAs to the same limits for 401ks – let all folks take part in these plans. Employers could still have the tax benefit for matching funds, but the “portability” issue would be gone, as would the need for all these rollover activities. Level the playing field, making the rules that are currently IRA- or 401k-specific apply to the new IRA plan.

Problem: 401k plans have limited investment choices, many of which are inappropriate or inadequate for the investor’s situation and goals.

Solution: Under the “new IRA” option I mentioned above, the field would be open to all investments available from your custodian. Custodians would soon learn to allow investments in virtually all available securities, as the investor can easily “vote with his feet” and move elsewhere with better choices.

Problem: There is no “guaranteed income” choice available in the 401k. Since the original intent of the 401k plan was to replace the defined benefit pension plans – you know, the kind of pension where you’re guaranteed an income, often inflation-indexed, for life – it seems like you should be able to emulate that in a 401k plan.

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