“In 2020, there is no tax advantage remaining to the 401k.”
It’s just one of many hot takes in a Bloomberg Opinion piece burning through the Internet.
Coverage, deferral, escalation, and accumulation rates are all up (significantly, during a pandemic) so now would be the perfect time, it argues, to wreck it all and start again.
The thrust of the thesis is that tax and interest rates are far lower today than in 1980(!). The saving and investment vehicle has therefore lost its luster, and workers have little incentive to participate given its supposedly outdated structure.
Most of the piece is dedicated to undercutting its own argument. Examples:
- “So in 1980, the government offered a huge tax savings to encourage retirement savings, while today it offers little or no benefit. The employer contribution is still valuable, with a 100% match worth 2.3% per year in extra return over 30 years.”
- “Another big change since 1980 is the availability of zero-cost, tax-efficient, well-diversified index funds in convenient form for retail investors. Yes, 401k plans have reduced costs as well, but to a much smaller degree.”
- “One easy change is to allow workers to roll 401k funds over to self-directed IRAs at any time (now they can do it only when they leave a job). That would force 401k platforms to compete in an open market, and it costs nothing.”
We get that the last point refers to worker choice in picking an investment vehicle, but different structures obviously now exist, and it’s worded in a way to suggest 401k plan providers don’t have to compete on price, performance, service, etc.
What this, and so many similar arguments miss is that the structure is sound, while (some of) the variables are not.
Reform? Yes. Replace? No.
“Now that 401ks have become the primary source of retirement savings for the middle class working in the private sector, we should restore the large tax incentive and bring fees into line with taxable investment standards,” an obvious point with which we wholeheartedly agree, but the piece’s title and lede “401k Plans No Longer Make Much Sense for Savers,” does not convey.
It concludes with the “frog in boiling water” experiment, myth, fable, lie, whatever… with participants as dim amphibians and 401ks as heat.
We’d suggest a different anural-themed anecdote, this one involving a scorpion. For whatever reason, certain individuals deem to destroy what’s been built at the moment of its success. We don’t claim to know why, it’s just their nature.