Your money is fine, but policymakers are finally figuring out that the 401k is an ineffective retirement arrangement for a lot of people. The tax breaks favor the wealthy rather than poor and middle-class savers in lower tax brackets. If you’re a successful investor, you’ll wish you had LESS MONEY in your 401k, and more in a Roth or taxable account. And like health care, much of the Gov’t tax break gets siphoned-off into fees, commissions and trading costs. Only a minority of retirees are following the practice of investing in low-fee index funds, which tends to be the more successful path for about 95% of the population.
In my own case, I needed “X” dollars to retire early. And I was going to save “X” dollars whether there was an IRA/401k, or not. Having a 401k just meant that money I’d be saving anyway got diverted to a “tax-advantaged” account. No additional retirement savings occurred as a result of giving me the tax break.
{{ All of this cost the government an estimated $185 billion in 2019, or 0.9% of GDP. That’s not nothing. And in theory it’s justifiable because it creates a powerful incentive to save for retirement. More retirement savings have a triple benefit: for the economy overall, since they fuel growth; for the government, since retirees with income are less likely to be a burden on the state; and, of course, for workers who might not save enough today and regret it later.
Then again, maybe not. The first rumblings that the benefits of the tax breaks may be overstated came in a 2014 study of Danish savers. Without tax-advantaged accounts, it found, people just put their money in another kind of account. People did save more in retirement accounts, but that’s mostly because of automatic paycheck deduction. Subsequent research in other countries found similar results. Not only did the tax incentive fail to encourage more saving; the biggest beneficiaries tended to be the wealthy. }}
I will point out that the Roth 401(k) is real, so having money in a Roth and having money in a 401(k) are not necessarily in opposition.
I highly doubt that 401(k) plans will be eliminated. Even the author admits:
Still, there is a case for the 401(k). The saving rate is not the only metric to judge the value of these accounts. There is a justification, for example, for the penalty for early withdrawal: It prevents people from spending their savings too soon. If you think that’s a valuable social goal, then you may also support preferential tax treatment of accounts with an early-withdrawal penalty.
What is more likely to happen is that there will be limits placed Roth accounts for high income earners. That has already been proposed in the original Build Back Better bill.
The UK has the ISA account. You put after tax money in and don’t owe tax when you take it out. Fairly generous limits, though nothing like my solo 401k. Expect we will get something like this in the US eventually.
Personally, I need that solo 401k to try to get that MAGI down enough to qualify for Obamacare subsidies. Not an issue in the UK…
All that pension money has to go somewhere. Where do you suggest? Payroll deductions to a brokerage account?
Payroll deduction makes saving/investing easy even convenient. Relatively painless. That convenience gets many to participate. Not to mention employers match.
All of this cost the government an estimated $185 billion in 2019, or 0.9% of GDP.
Both of these cannot be true. If it cost the government money, then investing in a 401k advantages the investor by reducing their lifetime tax burden.
Well, perhaps a caveat, you might WISH the money you put into your 401k was instead in a Roth - but in the same way that you might also wish you won the lottery. Doesn’t mean that buying a lottery ticket is a wise financial decision any more than avoiding the tax advantages of a traditional 401k and instead saving more money in an after-tax account is necessarily any wiser.
As you later prove my point:
the biggest beneficiaries tended to be the wealthy.
Yet you seem to think these wealthy people are not “successful investors.”
Actually, the article suggests an option, although it appears to refer to ‘employers’ instead of ‘employees’ :
Enter the employer-sponsored liquid account. Like a retirement account, it is funded by payroll deductions, but unlike a 401(k), it allows employers (sic) to withdraw money without a penalty when needed. As these accounts grow in popularity, they may displace the 401(k). More liquid accounts, similar to a Roth IRA, have been become popular in Canada, and Canadians are saving more in them than in the tax-advantaged retirement accounts.
That said, SECURE 2.0 already added provisions to allow employees to withdraw up to $1,000 without paying an early withdrawal penalty, and to set up an emergency savings account from payroll deductions in addition to their 401(k) Secure Act 2.0: What You Need to Know – Forbes Advisor
Neither is true. Mainly because of the terrible quality of journalists today. What they are mostly discussing regarding 401k (traditional) is a DEFERRAL of taxes. The government may be receiving $185B less today, but they will be receiving whatever taxes are due when the funds are withdrawn in the future.
It would be just as nonsensical to say “Due to the withdrawals from the $23 trillion 401k+IRA balances, the government is collecting an extra $250B a year in tax revenue, or nearly 1.5% of GDP.”
I think the biggest problem with 401ks are the fees. The average private company 401k plan has 10 times the fees of the Federal Gov’t’s Thrift Savings Plan for it’s employees.
You factor in the “skim” of an extra 0.50% per year in fees, and you’re losing about 15% of the account value over a 50-60 year investing lifetime.
{{ Investment fees for private employees vary from one 401(k) plan to the next, but, according to the ICI, the average plan cost for participants was 0.58% in 2017 (though it’s often lower at larger companies).26 This means that a typical 401(k) plan charges roughly 10 times what the federal government does for its employees. Because those fees are taken out every year, they have a compounding effect and can make a substantial impact on your returns over the long run. }}
When I was living in Texas, I was astounded that VALIC was taking almost 3% per year from Texas teachers retirement accounts. Couldn’t one of the math teachers explain how much they were getting screwed? {{ LOL }}
That’s not specifically a 401k problem, it’s a financial industry problem. After all, all the money for those fancy buildings and high salaries has to come from somewhere. And the 401k is one the least of these types of problems, because they are at least regulated to some extent. Standard wrap accounts charge a large fee on top of the individual fund fees. And the worst, the absolute worst, of all of them are insurance brokers/companies. They charge hugely absurd fees for years and years and years until you finally just barely breakeven, and then they still continue to collect high fees until the end. And they just love when people end the contract early because they make a ton of money from the “break up” fees that they charge.
But this discussion was more about the taxes and how they aggregate.
While it may be costing an extra 0.5% a year while in the same plan, there are very few people who will remain in the same plan for 50 or 60 years. Personally, over my ~35 year career after college, I had 9 different employers (some changes due to mergers/acquisitions) and 10 different 401(k) plans. That gave me many opportunities to roll my money out of my 401(k) plan and into an IRA. That said, I did have employers who offered me plans with no fees and extremely low expense ratios (0.015% on VTI, compared to 0.03% for buying VTI in my IRA). So, between employers with good plans and rollovers, minimizing the skim isn’t that difficult, if you’re willing to take a little time.
Got a cite for that? Because according to this ICI report per29-06.pdf (ici.org) 401(k) investors are (and have been) paying lower than industry average fees:
Most of the 401(k) plans that my wife and I had available to us included at least one or two index fund options that had what I would consider reasonable fees. There were other fund options that were not such a good deal. The couple of times that I switched employers or when I retired, I rolled things into an index fund with Vanguard or later into a brokerage account where I had more control over the fees that I paid.
