Since entering the workforce, I have done my best to become intimately familiar with 401ks. I have the advantage of having access to one of the best, the TSP. Not only does this government employee savings vehicle have super low fees, it’s also the subject of a huge number of articles and Bogleheads postings. Most of my questions are just a quick Google search away. It’s a personal finance junkie’s dream.
There are lots of 401ks (and similar savings vehicles) out there, so I’m not going to go into too much depth with those. Some are certainly way better than others, and I wouldn’t be happy being stuck with a dumb one. Many have written about what to do in this situation. Contribute nothing, contribute just enough to get the full employer match, contribute the limit but move your money later. There are many options, none of them ideal.
But I want to go even farther down the ladder of disenfranchisement. Many Americans do not have access to any of these plans. If you’re not self-employed but your boss offers nothing, you’re pretty much out of luck.
Non-working spouses also get the short end of the stick. A married couple where one person (with a 401k) makes $50000 and the other $0 might be allowed to save a max of $29000 in tax-advantaged accounts. If each partner had a 401k and made $25000 they’d be allowed to save $47000 in tax-advantaged accounts, nearly their entire combined incomes! And heaven forbid that one-earner couple doesn’t have access to a 401k. That bumps their amount they can save down to just $11000 in tax-advantaged accounts.
This is a gender equality issue because women are still more likely to be the non-working partner in a relationship. And in many cases, the partner without access to a 401k is the one who can get ripped off by these policies. Different 401ks have different policies regarding spousal consent. While writing this article, I learned that the (government) TSP has two opposite policies for its two classes of retirees. One class needs spousal consent to take an early distribution or loan. For the other class, the owner of the 401k essentially has complete control.
There are a few different proposals to address this.
1) Expand Social Security: Debate the whys and wherefores all day, but overall, 401ks aren’t working so well. Maybe the best alternative would be to expand a program that already does a lot more than these weird little accounts.
2) Government 401ks: When it comes to Social Security, hatas gonna hate. Some propose turning Social Security itself into a more 401kish entity, but I don’t think this is wise. President Obama has proposed a “MyRA” system, which is better than nothing, but way tinier than a good employee 401k. It’s pretty similar to Roths, but great for folks who have a hard time getting the financial system interested in the small amounts that they are able to invest.
3) Private 401ks: Private companies like Vanguard and Fidelity make it pretty dang easy to set up an IRA for yourself. Why is it that you can set up a Roth IRA in a matter of minutes, which you can fund with $$ you get from your employer, but you can’t set up a 401k for yourself in a similar fashion (unless you’re self-employed)?
Now, I’m sure there are actual answers to this, but none of them would really satisfy me. I think this would also be a good political compromise. You can sell it as individuals boosting the economy by putting their money in the stock market through private companies. Doesn’t seem like it should be terribly controversial. Then again, I say that about a lot of things.
So, this system ain’t perfect. But here are a few options.
1) Use the tax-advantaged savings strategies that are available to you. Don’t put off saving for retirement until the day you have a sweet 401k with low fees and a high match. Do what you can now.
2) Sometimes taxable accounts might make sense. These will be especially attractive if your tax-advantaged savings are limited. Heck, even relatively wimpy savings methods (cash under mattress, savings account, piggy bank) beat the heck out of spending all your money.
3) Think of savings methods that your employer provides as an important part of compensation. Ask questions before you’re hired. And if your employer doesn’t offer anything good, complain.
We can also take our complaints higher. Whatever your opinion on 401ks, be sure to share it with your elected officials.