Dear Mr. Geithner,
I read over the weekend that as Treasury secretary, you've been doing many good things for people with 401(k) plans. I understand that you're requiring all plans to disclose their costs, making funds inside the plans disclose their costs, and working on an annuity option for participants.
For many years, economists and others have claimed that companies involved with exports operate at a disadvantage because the U.S. is the only industrialized country where health insurance and pensions are employer-based. In addition, it is estimated that compliance with the U.S. income tax system costs taxpayers more than $300 billion every year.
When 401(k) plans first started, they were additive to regular defined benefit plans, and most companies paid the full cost of administrating the plans. Over time, companies did away with defined benefit plans and now employees have to rely on Social Security, 401(k)s, IRAs and personal savings to fund their retirement.
Many 401(k) plans have very limited investment offerings and the total package is quite expensive for the owners of 401(k)s. The employer also has costs associated with running a 401(k) plan they do not recover. It boggles the mind that every employer has to reinvent the wheel and have an individual plan, and that each employer has to hire experts to create the plan to make sure the plan complies with the latest rules and regulations.
I urge you to do to do away with the present Rube Goldberg system of employer-based 401(k)s and instead give all employees and self-employed people an individual account.
Doing so will expand the investment choices of every person in the U.S. It will also reduce the cost to the workers, which is extremely important when you are saving money over a 40- to 50-year working life. The present system of mostly high-cost 401(k)s works as a negative compound-interest drag on retirement savings. In addition, most plans are very limited in the investments that they offer to fund the employees' retirement and to reduce risk when needed.
In my self-directed IRA with Fidelity Investments, I can invest in a CD, bond, preferred stock, or common stock -- even buy an annuity if I want to. If Fidelity does not have what I want, I can open an IRA at a credit union. Or I can take my IRA money and give it to an insurance company to buy an annuity. I have a huge amount of flexibility, and Fidelity does not charge me a cent in fees each year to maintain my account. I pay a very reasonable commission if I buy a stock or bond. If I want to buy a mutual fund, I can do so with no commission for many, though they do have their own expenses.
Are you aware that Fidelity Investments and other brokerages offer free solo or personal 401(k)s?
It would be so easy for an employer to send its matching contributions, if any, to the employees' personal 401(k)s, along with the employees' contributions each payday. There would be no reason to have every plan in the U.S. keeping books on their own plans.
Think about the waste of money in computer systems, a big board of directors, and administration for the federal government's own Thrift Saving Plan. It's unnecessary and wasteful. All employer contributions should vest immediately and by every employee having their own personal 401(k) plan, there would never be any lost or orphaned plans for employees to lose track of over a long working career.
Instead of disclosing what a bad deal most employees have now, how about stepping up and eliminating this costly system? After all, you owe us taxpayers something after Bear Stearns, Lehman Brothers and the entire mortgage-backed securities mess.
Sincerely,
Matt Horween
