To paraphrase Sir Winston Churchill, “It has been said that the 401(k) plan is the worst form of retirement policy except all the others that have been tried.”
We’ve seen an unending volley of criticism targeting the 401(k) plan for some time now. It’s been blamed for everything from holding people back in terms of retirement to allowing people to benefit in excess.
Too many wonks are asking questions that leave one wonder if there’s a future for the 401(k). There’s only one problem with this: For all its shortcomings, the 401(k) plan stands out as the single most successful retirement policy implementation this country has ever experienced (see “401(k): Kill it or Expand Its Reach?” FiduciaryNews.com, October 3, 2017).
We’ve seen the vulnerabilities of defined benefit programs from pension plans to Social Security (but I’m being redundant).
Sooner or later, without a growing population (of either workers or citizens respectively), these instruments must devolve into a Ponzi morass. The mathematics of their assumptions make this an inarguable conclusion.
Worse, at the same time the numbers crunch pension plans towards their inevitable abyss, the vehicle enables a tragic dependency when self-reliance should be cultivated.
“Self-reliance.” That’s the real power of the 401(k).
As we all know, the best way to get to the destiny of your choice is to control the vehicle that’s taking you there. Defined contribution vehicles in general encourage employees to control their own destiny. With defined benefit plans they are forced to rely on the kindness (and competence) of strangers. This latter condition isn’t a strategy to count on.
Above all the imagined challenges of the 401(k) stands one real problem: Not enough employees have access to 401(k) plans.
Now, I know what you’re thinking: “But everyone has access to IRAs.” This is true. But everyone has always had access to IRAs, even before there was a 401(k).
Yet, it was the 401(k) plan that blossomed into a retirement savings powerhouse, not the IRA (with the exception of Mitt Romney’s IRA, and that’s an exception that proves the rule).
The simple truth is the framework of the 401(k) makes it incredibly easy and harmless to save for retirement in ways the IRA cannot do without strained effort (which, by definition, eliminates the “easy” side of things).
And each day an employee isn’t saving – each click of the clock that savings growth isn’t compounding – that employee risks facing a less-than-comfortable retirement.
Nonetheless, while time burns away, politicians appear unconcerned, preferring to fiddle with unproven state-based schemes rather than codify the obvious solution.
We all know small businesses represent the weakest link in the 401(k) chain. Small businesses are where most workers are employed. Small businesses are also the least likely to offer a 401(k) plan. (I’m not talking about 1-2 man professional shops or similar microbusinesses where the owners almost always create tax-deferred savings plans like the 401(k).)
It makes sense that firms with a dozen or so employees don’t have 401(k) plans. They are beset by three seemingly insurmountable obstacles: They’re too hard to set up, too costly to maintain, and present an undue risk to company executives who don’t have the time to fully embrace the attendant fiduciary duty required of these plans.
Some small businesses lucky enough to belong to a proactive business association are already making use of a tool which overcomes these three obstacles. Currently, the 401(k) MEP allows unrelated businesses to pool their employee’s retirement savings into a single 401(k) plan. These companies would not be the sponsor of the plan, so their executives eliminate nearly all of the personal fiduciary liability of sponsoring a retirement plan.
Furthermore, as the plan is sponsored by the business association, member companies do not need to devote staff or time to maintaining the retirement plan.
Why can’t all small companies enjoy the benefits of this clear and present answer to their problems? Because the 401(k) MEP is not accessible to all small businesses.
It is only available through associations of businesses that demonstrate “commonality.” Commonality can include all being in the same business or sharing a geographic location. Pooling 401(k) plans outside these restriction is possible, but the DOL made clear in 2012 that the participating companies retain all the responsibilities and liabilities as if they had their own plans. This defeats the advantages of the pure 401(k) MEP.
Here’s the real annoying fact. Congress has had legislation on the docket to override the DOL’s restrictions and legalize so-called “open” 401(k) MEPs (although they may refer to them by a new name), for several years now.
Much like repealing Obamacare, it’s always been “we’ll take care of that later.” As Congress contemplates overhauling the tax code, wouldn’t now be the “later” we’ve been waiting for to finally make the 401(k) plan effortlessly accessible to all workers?
Though it has become a favorite whipping boy of public policy pundits, the 401(k) remains America’s most successful retirement plan.
Churchill famously said, “However beautiful the strategy, you should occasionally look at the results.” Perhaps it would benefit more people if industry, government, and regulatory leaders concentrate on positive results of the 401(k) compared to the alternatives and make the vehicle more accessible to all workers.
The 401(k) MEP does just that.