Done To Zen

Just today morning, I was thinking about how the government managed to do something right for a change with 401K and other retirement accounts. Then I read this article from Generation X Finance about how these brilliant politicians are trying to completely destroy 401K, quoting from this article on Investment News.

Under Ms. Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3% a year, adjusted for inflation.

Are they serious? I already have to pay a significant chunk of my paycheck into social security, knowing full well (practically) that I’m not going to see a penny by the time I’m ready to retire 30 or 40 years from now. Now, they want to force me to put another 5% of my paycheck into government bonds? And they are going to turn over the administration of this plan to the Social Security Administration?!

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

Then what’s the point of investing in 401K? The mutual fund choices in my 401K are not exactly leading the pack when it comes to low expense ratios and low turnover rates. If not for the tax breaks, I would be investing the mony in Roth IRA and taxable brokerage accounts, no question about it. Remember, too, that early withdrawal from 401K is penalized at 10% while you always have full control over your brokerage accounts.

“I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ms. Ghilarducci said.

To be technically accurate, the nation isn’t spending a dime on retirement. Rather, with the tax breaks, the government is simply not receiving the additional income to waste on half a dozen useless projects.

Here’s an idea…

Instead of mutilating 401K under a train-wreck, how about you take my SS payments and put them in those 3% inflation-indexed government bonds? $2400 per year ($200 per month) will magically transform into $186,391 by the end of 40 years.

Another idea would be to place SS payments in high-interest savings/money market accounts or even CDs that offer between 3% to 5% in interest. At 5%, $2400 per year will result in over $300,000 for retirement. If the government wants to guarantee retirement, they can choose to guarantee 100% of the funds in retirement CD/savings accounts.

Finally, the government can place SS payments in age-based retirement funds to be reallocated (short of major volatility/downturn in the market such as the current situation) every 5, 10 years so that investments are moving from stocks to more conserative bonds and/or cash so people getting closer to retirement do not have to suffer from the volatility of stocks as much any more. At 8% in return, $2400 per year will result in a nest egg of $670,000.

The thought that there are some people who think taking the tax advantage away from 401K is a good idea is just mind-blowing, but that 5% mandatory contribution idea they came up with makes my blood boil.

US News published an article regarding the attributes of an average 401K account, and I thought it would be interesting to compare my account with the so-called “average”:

1. Average company contribution @ 3.2% of salary. My current company is above average at 4%.

2. Average asset allocation @ 18 choices. My company offers 13 choices, not including company stock. Below average.

3. Employee participation average @ 5.6% of salary. I obviously don’t know what my company participation is like, but my contribution was 4% until I grew wiser and upped the % so I could max out the account.

4. 30% of plans offer Roth 401K. My company does not offer Roth 401K. When I asked around about this, I was told that I should go invest in a Roth IRA. It wasn’t clear whether the powers-to-be know about the difference in contribution limits. Anyway: way below average.

5. Automatic enrollment @ 50%. Yup, my company automatically enrolls employees at 4% so they can take advantage of the match. Average.

6. Immediate vesting @ 44%. We are always fully vested in whatever goes into our 401K account, whether be it contributions or matching.

Overall, I guess my 401K plan is OK. The investment vehicles lead something to be desired, but they could be a lot worse — I mean, the expense ratios, & so on, are OK, though they aren’t anywhere close to Vanguard index funds. The plan offers a decent match and vest us immediately.