Company sponsored retirement programs are costly to administer, and provide employment benefits in the form of tax reduction. By providing employment benefits in this manner, government is subsidizing the businesses that submit to the administrative costs. Large companies can more easily afford this administrative cost. The intention to reward workers becomes a reward for working in a larger organization. When workers change or lose their jobs, they must transfer their 401(k)s and in some cases (when they are hired by a small firm or are not immediately re-hired) are no longer eligible for tax advantaged retirement savings. This compounds the pain of unemployment by effectively increasing the person's tax rate. Finally, 401(k) rollovers have created an entire bureaucratic industry, tapping the productive force of many bright and hard-working people.

There is a simple solution: Replace 401(k) plans by increasing the amount all individuals can contribute to their traditional IRAs. And if a company chooses to administer it, a percentage of every check could be directly deposited. This change would help to level the economic playing field for small American businesses, eliminate the harsh tax penalty upon unemployment, and simplify the financial accounts of most working Americans. 401(k) plans can already be rolled into IRAs, so conversion from legacy policies would be painless.

What about the government's intention to reward workers? The financial incentive of a pay check is designed to be just that, but additional reward might include a federal income tax holiday for the first $50k in earned income, for example.

Special cases of inconvenience and frustration are many, I'm sure, but consider the case of a married couple, both of whom work. One employer provides a 401(k) plan and the other does not. Saving equally, the person with a 401(k) takes home more money. This means that in order to save equally, one person is structurally required to subsidize the other. Adding structural financial conflict into marriage should be avoided as a matter of policy.

Labels: Public Policy