Future of 401ks

[AvidIndoorsman]

Not sure that's true either. I audit utility companies and many of them still have defined benefit plans. I would say the average cost for those plans right now is about 30% of salaries.

I think if the same company put 30% in your 401k for you, you would be better off.

I do think the poor financial literacy is an issue as you are right about buying high and selling low. The lifestyle and target date mutual funds are helping that a lot though.

No matter what route you go for the average middle class worker to save enough for 20+ years of retirement they need to contribute a large part of their salary; that large nest egg is a tempting target, doesn’t matter if it’s C-Suit, Congress, or the individual themselves.

I remember you saying a while back something to the effect of that some folks are savers and always will be and some folks are spenders. 401ks benefit the former and pensions the latter.

SS in my mind should be solely for disabled, children, etc. you know like it was originally intended.

 

[BuzzH]

I think even if pensions were popular still, the same people would be making the same mistakes with them. The days of people working 30+ years at the same company earning a pension are over. Even my clients that have those gold plated pension plans and post retirement health insurance benefits have a hard time getting people to stick around. The 22 year old getting paid $40,000 with a $30,000 benefit package is gone the second they get that first offer for a job paying $50,000 with a $5,000 benefit package.

I can't help a 22 year old that sucks that bad at basic math...

 

[TN2shot07]

I think even if pensions were popular still, the same people would be making the same mistakes with them. The days of people working 30+ years at the same company earning a pension are over. Even my clients that have those gold plated pension plans and post retirement health insurance benefits have a hard time getting people to stick around. The 22 year old getting paid $40,000 with a $30,000 benefit package is gone the second they get that first offer for a job paying $50,000 with a $5,000 benefit package.

That supports the what can you do for me right now attitude prevalent in society. We have people regularly leave for the first $1/hour raise they can get, regardless of additional benefits.

 

[TN2shot07]

SS in my mind should be solely for disabled, children, etc. you know like it was originally intended.

Absolutely no argument but I don’t think that genie is going back in the bottle.

As stated above, if ss is really going to be intended to fund people’s retirement I haven’t seen a better route than something like a tsp plan. Hopefully that couldn’t be accessed until whatever is determined as “retirement age” and then only your monthly income like ss is now. Personally I don’t like it but I don’t know what else to do

 

[npaden]

No matter what route you go for the average middle class worker to save enough for 20+ years of retirement they need to contribute a large part of their salary; that large nest egg is a tempting target, doesn’t matter if it’s C-Suit, Congress, or the individual themselves.

I remember you saying a while back something to the effect of that some folks are savers and always will be and some folks are spenders. 401ks benefit the former and pensions the latter.

SS in my mind should be solely for disabled, children, etc. you know like it was originally intended.

The annual cost of keeping a defined benefit plan going is MUCH higher than a 401k plan. Actuary studies, active investment advisors, audits, etc. I audit a small defined benefit plan and it's annual costs are probably triple or quadruple a similar sized 401k plan.

The other issue with the way most defined benefit plans work currently is that you have to work 5 years before you are vested in any kind of benefits so if you work somewhere 4 years and then leave you get zilch. Even the dudes paying the 10% penalty and buying a boat get something out of it. It would be interesting to see the statistics but I would gamble that 50%+ of the U.S. workforce has never stayed at the same job for 5 years.

I think if defined benefit plans are going to work they would have to require significant contributions from employees. I have a few clients that do require employee contributions (generally just 1 or 2 percent) but most don't require any contributions. To have competitive pay you can't be contributing 25% or 30% for retirement benefits in my opinion.

I would say the average defined benefit plan I deal with right now contributes 18% to 20% of the employee salary into the plan and then nearly all of them are underwater right now due to baby boomers retiring during unheard of low interest rate period and taking lump sum distributions using net present value calculations at the low interest rates. Now they are having to pay additional surcharges up to 25% on top of the 18% to 20% they are already requiring. i.e. dude makes $50,000, the employer contributes 20% so $10,000. Then the employer has to pay a surcharge of 25% of the 10,000 so that's another $2,500. That's effectively 25% of that employees salary.

10 years ago most of my clients had post retirement health insurance coverage as well. That can get very expensive. I've had several discontinue this for new employees coming in but still grandfathering in the folks that were already there. They typically also offer full family insurance coverage with low deductibles paid 100% by the employer.

I really do have a few clients that have a benefit load over 100% for their lower paid employees like cashiers and entry level outside plant guys. 10 or 15 years ago these were very highly desired jobs because of the amazing benefits being provided. Now they are struggling to find people willing to work since they are 10% or 15% below market rates for salary because they are paying so much for benefits.

I don't think there is an easy answer.

 

[BuzzH]

Absolutely no argument but I don’t think that genie is going back in the bottle.

As stated above, if ss is really going to be intended to fund people’s retirement I haven’t seen a better route than something like a tsp plan. Hopefully that couldn’t be accessed until whatever is determined as “retirement age” and then only your monthly income like ss is now. Personally I don’t like it but I don’t know what else to do

Yep. Almost 120K TSP millionaires that are making wayyyyy under market wages for comparable work in the private sector.

 

[Big Fin]

This is more of a tax policy discussion; a discussion that was going on pre-1776, and has continued. I remember when I first started as a tax accountant and there was the big fight over taxability of SS. Since it had already been taxed, but the earnings (if you want to call it that) weren't, a compromise was reached on "means testing" for the taxability rather than means testing on the ability to receive it.

In the debates over tax policy since I started in 1989, there have been common outcomes. First, the well-connected and politically involved folks get the better end of the deal. Second, this country values capital more than labor, with both being necessary for a productive economy.

That second point, capital v. labor, is at the foundational issue in many of our political debates. It is expressed in many ways. I'm always interested to hear the reasons for valuing labor over capital, or valuing capital over labor.

The tax code and associated regulations are a great way to express the difference in how we value capital and how we value labor.

The overall tax burden from returns derived by labor is now way higher than it is on returns derived by capital. That big swing has happened in my adult life. It is an expression of our collective values as a country, whether we want to admit it or not.

The change in the 1980-2000 from Defined Benefit Plans (pensions) to Defined Contribution Plans (401K/Profit Sharing Plans), is another way we express these values of capital v. labor. DB plans were largely accepted as an employer (often pooled capital) responsibility, and thus a liability. Pooled capital used state liability laws to shed that DB liability, such that Congress had to establish the Pension Benefit Guaranty Corporation to bail out the groups of pooled capital that used liability protection laws to leave pooled labor holding the bag. Thus the migration toward DC plans that put the retirement burden on pooled labor, most of whom don't have enough disposable cash/income to accumulate much in the way of retirement benefits.

And now, with most pooled capital organizations removed from the DB liability owed to pooled labor, the next step, which is the focus of this thread, is how do we tax that DC benefit even more now that the DC balances accumulated in 401K plans are mostly from the labor side of the equation. Is that another expression of our value of capital v. labor?

Anytime Congress gets in these discussions, they hope Americans get bogged down in the minutia and that we don't see it as an debate of how we value capital versus how we value labor. These debates are just that.

Sorry for the side bar. Carry on ........

 

[VikingsGuy]

Heaven forbid we tax corporations…

Silly trope - we should tax them at the prevailing international rate - which I think we are close at the moment, but had been much higher than the norm for years. It is a hidden tax, as it is just passed down to retires, pensioners, customers, employees, etc, Corporations are accounting vehicles. It is dividends and capital gains that should have their rates raised to ordinary income levels. Why should actual work be tax disadvantaged in favor of financing?

[edit: posted before seeing BigFin’s post - he did a better job of saying it than I did]

 

[VikingsGuy]

Ah but they ain't scheming how to eliminate ruling class parachutes.

Or govt pensions

 

[noharleyyet]

Or govt pensions

A yuge sub phylum of the ruling class that gets to live inside the moat & drawbridge.

 

[Irrelevant]

I can't help a 22 year old that sucks that bad at basic math...

We had to completely restructure our benefit package for new hires because of this exact issue. $XX/hr without bennies was apparently more attractive to them than $(XX-2)/hr with bonuses (10-20%), 401k match, and decent health care.

 

[SAJ-99]

To add a little to what @Big Fin said. It is also about risk. In a DB plan the market risk is on the employer while the employee is just promised an income stream. The PBGC ensured that the employee didn't get screwed by the corporation declaring bankruptcy. The corporation argues that keeping the DB adequately funded is the most difficult at the worst time = recession means net income falls and stock price with it and funded ration of DB plan gets worse. Company didn't want to fund the gap in difficult economic times. A DC plan was the solution. The risk gets transferred to the employee. If the market falls 50% on a war or pandemic or whatever, the employees bears the risk.

I agree that today's argument is mostly expressed in terms of taxes of labor vs capital, today vs future. But that isn't really what it is about. That argument could as easily just say money derived from any source is considered income and taxed at the same rate (LT cap gain rate goes from 15% to income table). No one is arguing for that change though. What worries me now is many of the responses here point to the same thing - the government opening an account for every person as soon as they get a job (even at 16yo), and a percentage of the income being siphoned off (a tax) to that account and invested in a target date fund that estimates a future retirement date. This could replace the 401k and eventually replace SS.

Both sides argue the collective result at retirement would be better. The Left would argue it would benefit everyone and protect them from themselves (people making bad decisions). True. The Right could argue that it helps increase current tax collections, however would result in even bigger Government. Also true. But getting rid of a 401k helps corporations because any "match" would disappear. This is the backing that equalizes the push from both sides. And the market risk? the government is most able to handle the risk because it can just print money. Downsides? Oh I'm sure there are plenty, even beyond the obvious.

There will always be a top 20%, just like there will always be a bottom 20%. I'm not a big believer in "all we need is financial literacy". More and more I think the vast majority of people know exactly what they are doing. There will always be people that look for ways to exploit the rules to their benefit. For some that will be in the tax code, for others it will be in buying a freezer to stuff grandma in after she passes so they can keep collecting the SS benefits.

 

[npaden]

But getting rid of a 401k helps corporations because any "match" would disappear. This is the backing that equalizes the push from both sides. And the market risk? the government is most able to handle the risk because it can just print money. Downsides? Oh I'm sure there are plenty, even beyond the obvious.

Actually the match could stay pretty easy. Employment taxes have nearly always had both the employer and employee contributing. That's exactly how social security is set up.

 

[SAJ-99]

Actually the match could stay pretty easy. Employment taxes have nearly always had both the employer and employee contributing. That's exactly how social security is set up.

Agree. I should have been more clear. Companies voluntarily putting money in a retirement will end. Any new tax will hasten the death of SS.

 

[AvidIndoorsman]

Silly trope - we should tax them at the prevailing international rate - which I think we are close at the moment, but had been much higher than the norm for years. It is a hidden tax, as it is just passed down to retires, pensioners, customers, employees, etc, Corporations are accounting vehicles. It is dividends and capital gains that should have their rates raised to ordinary income levels. Why should actual work be tax disadvantaged in favor of financing?

[edit: posted before seeing BigFin’s post - he did a better job of saying it than I did]

Although cuts aren’t passed down they are just used for stock buy backs or dividends.

You want to operate in the country that has the wealthiest consumers and largest middle class in the planet you can contribute to the infrastructure.

 

[VikingsGuy]

Although cuts aren’t passed down they are just used for stock buy backs or dividends.

You want to operate in the country that has the wealthiest consumers and largest middle class in the planet you can contribute to the infrastructure.

Stock buy backs and dividends go to retirees, pensioner, etc. too. Some of the biggest PE investors are govt employee pensions and universities. I am saying all corporate taxes do is move companies off shore and drive ridiculous business decisions around tax avoidance. If you want to tax the uber wealthy (as I do) there are better ways.

 

[AvidIndoorsman]

Stock buy backs and dividends go to retirees, pensioner, etc. too. Some of the biggest PE investors are govt employee pensions and universities. I am saying all corporate taxes do is move companies off shore and drive ridiculous business decisions around tax avoidance. If you want to tax the uber wealthy (as I do) there are better ways.

and big universities…

*cough Harvard
*cough Yale

 

[jryoung]

Currently updating our retirement benefit program in our office so I can try and take better care of my key employees. It's frustrating when I can't get my youngest staff to even put in enough for my match on 401k.....but seeing some of my veteran/key staff not doing enough im trying to give them some golden handcuffs.

 

[AvidIndoorsman]

@Big Fin or @npaden

We have a safe harbor match at work for our 401k, and I have brought up changes we could make to maximize contributions and tax savings for the company.

What’s the best way to accomplish this?

Say an employee maxes out with $23k how can the employer max out their match at 60k?

 

[VikingsGuy]

@Big Fin or @npaden

We have a safe harbor match at work for our 401k, and I have brought up changes we could make to maximize contributions and tax savings for the company.

What’s the best way to accomplish this?

Say an employee maxes out with $23k how can the employer max out their match at 60k?

Sweet - getting free tax advice from the big guy