Kill the 401k. Expand the IRA

Its absurd that your choice of employer determines your retirement investment company, the choice of investments you can make, and can steer you to a company that can milk investors for high management fees and transaction costs. It’s a stupid and anti-competitive practice that deserves to die. What employers want from a 401k scheme is to be able to advertise retirements benefits to prospective employees. Employers, however, cannot be trusted to shop the marketplace of accounts for ones that are both effective and offer low fees. And once an employer chooses a 401k provider, its enormous work to undo this decision. The only explanation I see as to why the 401k exists at all is because 401k providers prefer dealing with employers and HR firms over individual investors for what this affords them: lock-in and the ability to choose the fees they charge within a more closed marketplace that provides barriers to competition. Having employers chose your retirement account provider for you is a moral hazard — it is ridiculous to suppose they will operate as a rational actor on behalf of employees, and ridiculous to presume employees rationally chose employers by the quality of the investment firm that their employer chose.

A lack of dilligence by employers is not the only problem. I’ve worked for small companies for 20 years. In most of that time, I either had no access to a 401k or no employer matching. As a result, my retirement account has suffered.

If we wished it:

• Pre-tax contributions could be made to 3rd party pre-tax accounts of a person’s choosing, as for IRAs.
• We could require companies to make deposits into the account of an employee’s choosing.
• Investment could be the default for new employers (as is the cases for a 401k).
• We could continue to allow employers to make untaxed matching contributions if they wished it.
• Pre-tax investing could be available equally to all, no matter your income, or the size of your employers.
• We could also remove penalties for withdrawals from pretax retirement accounts and replace it with income tax. Why not encourage investment by low income investors who might also have greater needs to access emergencies funds.

Kill the 401k. Expand the IRA. The only reason we haven’t done so is because 401k investment firms do not wish it, and our federal representatives place the wishes of investment firms above yours.