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The US Needs a Better, Simpler Retirement Savings Solution

Nov 23, 2015 7:27:40 PM
Author: Scott Hanson


The retirement savings "system" in the United States is a confusing mess, with an uneven playing field that tends to benefit those people who are fortunate enough to work for an employee-friendly company.

For those fortunate few, the retirement savings vehicle that offers the most advantages is an employer-sponsored plan, such as a 401(k), 403(b) or 457, but roughly 55 million working people don't have access to these.

This means that 55 million working people are, in a very real sense, left to fend for themselves.

In an attempt to remedy the situation, the Treasury Department officially decided to get into the retirement savings business by rolling out the myRA, a tax-advantaged plan aimed at lower-income workers who don't have access to an employer-sponsored plan. The myRA was designed with the best of intentions — getting more people to save — but I have my doubts as to whether this will have an impact.

When it comes to saving for retirement, the average investor has almost no training or strategy. Other than Social Security, which was designed with expert planning, years of consideration and with bipartisan support, most of the architecture of today's retirement plans is the result of a confusing, piecemeal mixture of laws and regulations that make almost no sense to the average citizen.

Consider how many types of retirement savings vehicles there are today: There's the 401(k), the 403(b), the 457, the 408, the individual retirement account (IRA), the Roth IRA, the Simple IRA and the SEP IRA. In addition to those, there's also the Keogh, the profit-sharing, and the Money Purchase. The list goes on and on. And now we can add to that list the myRA.

I would propose that, rather than adding yet another plan to try to find a cure for the millions of people who don't have an employer-sponsored 401(k) plan available, how about starting from scratch? How about simplifying the retirement savings plan landscape and leveling the playing field for all workers, whether employed by a Fortune 500 company or the convenience store on the corner?

"What if the playing field were leveled so that each individual could contribute the same amount toward their retirement, regardless of where they work?"

If this administration and Congress were serious about fixing our looming retirement crisis, here are a few steps that could be taken to move things in the right direction.

Have you ever wondered why it is that, in order to get the best tax breaks for your retirement savings, you've got to use your employer-sponsored plan? Simply put: If you don't like the retirement plan options available through your work and would like to use something else, well, that's pretty much too bad.

The main retirement savings plan, the 401(k), wasn't really even designed to be the nation's No. 1 retirement account (as it is now). It was actually just a by-product of a revenue act in 1978, whereby some clever folks found a way to create tax-deferred, employer-sponsored retirement plans.

In short, and somewhat miraculously, the 401(k) plan was actually created from a loophole.

Today, there is about $5 trillion invested in 401(k) plans. And while some employers do offer great investment options and match a percentage of their employee's contributions, that's certainly not the case for all 401(k) plans.

In response to some of the substandard 401(k) plans offered by some employers, the DOL is proposing new rules that will require financial advisors to act in the "best interests" of the employees when installing 401(k) plans with employers, or advising those clients about their retirement savings. OK, fair enough. But I find it a bit ironic that the Department of "Labor" is the agency in charge of the regulation and oversight of "retirement" savings.

Actually, 401(k) plans aren't a bad way to go — that is, if you are fortunate enough to work for a company that offers a low-cost plan, along with the aforementioned match. You are able to sock away as much as $18,000 tax-free per year if you are under age 50, and up to $24,000 (they call this a "catch-up") a year if you are 50 or older.

But what happens if your employer doesn't offer a 401(k)? Your only "viable" option is to use an IRA, which limits you to just $5,500 (plus another $1,000 if you are 50 or older). A better way would be to allow all Americans, regardless of their employer, to choose the retirement savings vehicles they believe is in their best interests.

What if the playing field were leveled so that each individual could contribute the same amount toward their retirement, regardless of where they work? What if the numerous retirement plans were replaced with one simple, easy-to-understand plan that was available to everyone? How about an IRA, for instance, that has the same limits as a 401(k) plan?

Do that, and our current system of dozens of different retirement plans could be replaced by just one, simple vehicle. An account that provides the same access and opportunity for the part-time worker as it does for the corporate CEO. A retirement system so simple that you don't have to hire a financial specialist just to figure out how much can be contributed, and when, precisely, the money must be withdrawn.

The newly created myRA sounds great in theory, in that it allows anyone the opportunity to set aside retirement savings without any account minimums. The reason most low-income workers don't save is not that they haven't accumulated enough to open an account at a financial institution – it's that they simply can't afford to save anything. On a weekly basis, they have to decide between such things as buying their kids a new pair of shoes or paying their rent on time.

Perhaps a better approach than the myRA — and the bureaucratic costs that will come with it — is to offer some sort of savings credit that would be deposited directly into a retirement account. Now, while there is currently the "Savers Credit" available to low-income earners, very few low-income earners take advantage of it because the credit is only available when an income tax return is filed.

While there are numerous possibilities, real progress will only occur when Congress finally takes our retirement income shortfall seriously and, rather than adding a fix here or a fix there — attached to some hastily prepared spending bill — instead designs a brand-new, truly inclusive savings system, from the ground up.

By Scott Hanson, senior partner at Hanson McClain Advisors.

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Read Scott Hanson's CNBC article, "My, oh myRA, what a misguided bureaucratic mess this will be"

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