Abolish the 401k investment plan?

[HazMatCFO]

Baghdad Jim McDermott in the news again. Why am I not surprised on this topic about abolishing the 401k program.

http://www.workforce.com/section/00/article/25/83/58.php

October 16, 2008
House Democrats Contemplate Abolishing 401(k) Tax Breaks
Powerful House Democrats are eyeing proposals to overhaul the nation's $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.

A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York, contains elements that are being considered. She testified last week before Miller's Education and Labor Committee on her proposal.  

At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.

Under Ghilarducci's plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

"I want to stop the federal subsidy of 401(k)s," Ghilarducci said in an interview. "401(k)s can continue to exist, but they won't have the benefit of the subsidy of the tax break."

Under the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said.

"I want to spend our nation's dollar for retirement security better. Everybody would now be covered" if the plan were adopted, Ghilarducci said.

She has been in contact with Miller and McDermott about her plan, and they are interested in pursuing it, she said.

"This [plan] certainly is intriguing," said Mike DeCesare, press secretary for McDermott.

"That is part of the discussion," he said.

While Miller stopped short of calling for Ghilarducci's plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.

Savings rate
"The savings rate isn't going up for the investment of $80 billion," he said. "We have to start to think about ... whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should."

"From where I sit that's just crazy," said John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, New York. "A lot of people contribute to their 401(k)s because of the match of the employer," he said. Belluardo's firm does not manage assets directly.

Higher-income employers provide matching funds to employee plans so that they can qualify for tax benefits for their own defined-contribution plans, he said.

"If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets," Belluardo said.

"This is a battle between liberalism and conservatism," said Christopher Van Slyke, a partner in the La Jolla, California, advisory firm Trovena, which manages $400 million. "People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny," he said.

The Profit Sharing/401(k) Council of America in Chicago, which represents employers that sponsor defined-contribution plans, is "staunchly committed to keeping the employee benefit system in America voluntary," said Ed Ferrigno, vice president in the Washington office.

"Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system," he said.

No legislative proposals have been introduced and Congress is out of session until next year.

However, most political observers believe that Democrats are poised to gain seats in both the House and the Senate, so comments made by the mostly Democratic members who attended the hearing could be a harbinger of things to come.

Advice at issue
In addition to tax breaks for 401(k)s, the issue of allowing investment advisors to provide advice for 401(k) plans was also addressed at the hearing. Rep. Robert Andrews, D-New Jersey, was critical of Department of Labor proposals made in August that would allow advisors to give individual advice if the advice was generated using a computer model.

Andrews characterized the proposals as "loopholes" and said that investment advice should not be given by advisors who have a direct interest in the sale of financial products.

The Pension Protection Act of 2006 contains provisions making it easier for investment advisors to give individualized counseling to 401(k) holders.

"In retrospect that doesn't seem like such a good idea to me," Andrews said. "This is an issue I think we have to revisit. I frankly think that the compromise we struck in 2006 is not terribly workable or wise," he said.

On Thursday, October 9, the Department of Labor hastily scheduled a public hearing on the issue in Washington for Tuesday, October 21.

The agency does not frequently hold public hearings on its proposals.

Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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[Wilbur]

Great.  That's what we need is another government version of Social Security, particularly since our current Social Security system is so well funded and working so great.  Lets give the government another account they can rob and promise to pay back later.

And, don't tell me 401k's are tax breaks.  While you don't pay tax on the money earned today that is put into a 401k account, it is still taxed when it is withdrawn.

[cannon_fodder]

quote:Originally posted by Wilbur

Great.  That's what we need is another government version of Social Security, particularly since our current Social Security system is so well funded and working so great.  Lets give the government another account they can rob and promise to pay back later.

And, don't tell me 401k's are tax breaks.  While you don't pay tax on the money earned today that is put into a 401k account, it is still taxed when it is withdrawn.

+1.

A government that takes away the right to bare arms and restricts protests rights, socializes health care, AND has a monopoly on most peoples retirement would be one step away from a totalitarian state.  The government could act as it pleases because it controls nearly every facet of your life.  No thank you.

All the socialists will come out of the woodwork now.  Capitalism bad!  Private retirement bad!  Private health care bad!  The government should control who employs who, for how long, and when they can be fired.  They should be in charge of our health and welfare.  They should get our retirement funds so they can be "more evenly distributed" and secured.  

And it will work as well, or worse, as social security and the current health programs.  Which are subsistent level at best, suffer from HORRIBLE fraud rates, are underfunded, and have massive inefficiencies.  YAY!  What a great model.  I wish everything was like that.

Add to that... Americans don't save enough.  Take away the 401K and you kill the incentive for people who do.  Sure you can argue that it will be a government mandated retirement saving, but we all know that is BS.  Social security was sold as the same thing, it simply isn't true.  

So, lets find more ways to punish those that attempt to save for a comfortable retirement.  Lets discourage investment in our economy and encourage more reliance on our government.  Everyone knows the government is caring, trustworthy, efficient, fiscally responsible, and capable of securing our private information.

Wait, that's Google.  The government can't do anything right.