reform 401k law to offer brokerage window

[cabronjames]

It's disgusting how employees are forced to pick from a wack limited list of funds in their 401Ks (or similar tax-advantaged accounts) that are
1. limited, & exclude many asset types, such as 30 yr Treasury bond index, or gold
2. have atrocious expense ratios of 1.00+% .  Even 0.50+% is horrid relative to Vanguard.

This is a form of corporate welfare to the financial services companies, paid for by the employees.  The employee has no choice of 401k provider.  When these 401k providers ever drone on about the virtues of free market competition, they cement their status among the world's worst hypocrites.

Is there any existing effort to reform the 401k laws?  There is a limited group of thought leaders that have focused their career on helping Average Jane USian not get screwed by the US financial services industry.  John Bogle, Elizabeth Warren, Clark Howard come to mind.  The few US politicians/statesmen like Bernie Sanders or Ron Paul (as opposed the majority of politrickians in both parties like Bush 43 & Obama) would be sympathetic to such an effort.

I would love to see someone like Bogle lead such a reform movement.

I concede this may be a fantasy naive wishlist given the Fed Gov politrickians we have in 2011, but I feel it's worthwile to state what we think policy should be like, if nothing else to contrast with existing policy.

At a minimum, I'd like to see
1. mandatory brokerage window in ALL 401k & other tax-advantaged accounts, with some reasonable limit on the transaction cost to buy or sell a ETF or mutual fund in the brokerage window (max of $20, free or $7 is better).  Exclude any leveraged or inverse funds.  If needed, it could be limited to something like 10 or 25 trades per year.  If need be,  it could be limited to ETFs or mutual funds with a certain minimum volume, if the desire is to limit a speculation mentality of obscure narrow asset types like the proverbial Vietnamese pharma industry index ETF.

From our Perm Port community perspective, this reform alone would allow us to implement the Perm Port, even if someone has the majority of the assets in their current job 401k.  Such an individual could accumulate new pay contributions into the money mkt/stable value fund, & periodically (each quarter, each year, etc) buy the trailing asset (bond, gold) with an ETF (TLT, SGOL).

This would also remove the bias against the long term employee at a given employer.  If someone has worked 20 yrs at an employer, it's like the bulk of their investment accounts is going to be in their employer 401k.  If they are limited to a mediocre list, then they are effectively biased against compared to a "job hopper" employee.  The job hopper employee would be able to mostly mitigate the effects of the mediocre 401k list, by rolling over his old job 401Ks into an IRA at a quality custodian like Vanguard.

Reform #1 would remedy a lot of what is wrong with the status quo situation.  In addition, it would be great to also see:

2. Remove the connection of the 401k to the employer.  This would be congruent with the trend of "there is no more lifelong employers".  The employee should have the choice to fund their account at the custodian at their choice.  The employer should be able to fund the matching funds into that account.  Or if this was deemed "to much effort/paperwork", I'd be OK with eliminating employer contributions, & just increasing the annual limit from the current $21.5K (16.5k in 401k + 5K Roth IRA) to something like $25K or $30K.  The employer could then still grant this contribution via paying more in salary or bonus, which the employee could direct to the IRA.  Usually this "employer matching contributions" is limited/minor anyways.

3. Would like to make the limit the same for everyone, as long as it's work income.  Why should the government discriminate against an employee that is not offered a 401k, or an employee vs a self-employed small businessperson?  Just make the same $21.5K (or whatever) limit open to all.  Eg The government should not care or discriminate if someone is an employee charity worker, & entrepreneur charity consultant, an employee pornographic industry worker, or an entrepreneur pornographer.

4. Finally, starting with the year the reform was implemented, make it possible for a person to "back fund" prior years.  For example, (extreme example but it can & does happen) if the reform was implemented in 2012, & Joe worked at Wack Arnolds in 2012 & 2013 & could only contribute $5K each in 2012 & 2013 due to low pay, but in 2014 started a business or career changed into a lucrative career employee job & made $200K in 2014, Joe would be able to max the $21.5K 2014 limit, as well as "back fund" $16.5K for each of 2012 & 2013.  It would not be possible to do this for years prior to the reform like 2011 or earlier.  This reform would help small business owners with highly variable income, especially a startup entrepreneur who "might work for near-free" for the first few years of the new business.

Would love to get your take on these ideas.

[stone]

cabronjames, I've got the impression that retail investment returns are not a goal for which policy is directed. The PP is a subversive way to wriggle past a carefully crafted system of cryptic wealth transference .

[TripleB]

If people refused to work for employers who offered shitty 401ks, then no employers would offer shitty 401ks.

I turned down two job offers after looking at the benefits package and being disgusted by the 401k options.

[cabronjames]

^ workers don't have much bargaining power currently.  Many workers would be happy to get a job offer, period.

Also, for us Perm Port types, any 401k lacking a Brokerage Window, is shitty, afaict.  I've seen a few lists of 401k mutual fund choices from myself & friends I was advising on investing.  None of them had gold or 30 yr treasury bonds.

Furthermore, does a gold or 30 yr treasury bond MUTUAL FUND even exist? 

afaict, Gold is not avail in mutual fund form, only ETFs.

30 yr Treasuries, the fund VUSTX last time I checked had some non-UST "garbage" (such as Fannie Mae, etc) & not long enough average maturity & duration.  In other words VUSTX is a weak alternative relative to the ETFs TLT or EDV.

[Storm]

If people refused to work for employers who offered shitty 401ks, then no employers would offer shitty 401ks.

I turned down two job offers after looking at the benefits package and being disgusted by the 401k options.

Right on, TripleB.  I'm with you.  You need to look at the entire package when accepting the job offer.  I've accepted job offers when I was single and younger where the benefits were not so great.  Now that I am married with kids on the way I look a lot closer at what they are offering.  My wife's 401k is terrible.  I honestly think her company must get some kickback from the provider because the fees are over 1% for even stable value bond funds... (WTF!??!?!)

It's time for everyone to stand up and say no to terrible 401k options.  I'm with Cabronjames that there must be some minimum acceptable standard written into law.

[cabronjames]

It's time for everyone to stand up and say no to terrible 401k options.  I'm with Cabronjames that there must be some minimum acceptable standard written into law.

Reforming "min acceptable 401k standards" could be a transpartisan issue, like when Ron Paul (R) & Alan Grayson (D) got to audit the Fed.  I mean poll results would be overwhelming for this.

The limitation is lack of education, & intellectual curiosity on this topic.  Many otherwise smart people & non-smart people alike, think this personal investing topic is as boring as going to the dentist.  Or they take a "it's all just a paper asset scam anyways", "I might not make it to that age anyways", or other such myopic/defeatist take.  Many people will do their due dilligence on buying a car or even a smartphone, moreso than do on their personal investing.  Not to mention the latest NFL draft picks, or who J Lo is dating, or other such entertainment.  Which imho, is completely back asswards, now more than ever, as it appears both parties' DC politicans are intent on defaulting on the American Average Joe via cutting &/or privatizing SS & Medicare in their "SuperCongress" "Grand Bargain" aka "Catfood Commission 2".

What percentage of the population is even decently aware of getting robbed via high expense ratios?  Maybe if our "aware" cohort could be doubled, there'd be a chance we could get some reform.

[moda0306]

Just an FYI, the closest thing to a decent bond fund in my 401(k) is a Dreyfus income fund that is filled with FNMA crap and that ilk... what did it do during the recent collapse?  Let a big fat fart... nothing... no bounce at all.

I can see someone maybe being a bit skeptical of 30 year treasuries... that they're too volatile and maybe go to 10-years or something, but we've repeatedly seen how these crap quasi-safe bond funds are a complete joke.

The lack of a good mid-to-long-term treasury bond fund is a joke.

[MediumTex]

The PP is a subversive way to wriggle past a carefully crafted system of cryptic wealth transference .

What a brilliant comment.

[KevinW]

I've thought of reform #2 myself.  It would be nice if I could pick whichever 401k provider I like, and have my employer forward contributions to them.  That would mirror the status quo with direct deposit, where we're free to pick whichever bank we like.  Imagine if your employer could only deposit your paycheck at one bank and taking a job meant you were forced to use that bank.  Crazy, right...?

Some 401ks are fine for PP purposes.  A brokerage window is great.  Fidelity and Vanguard both offer acceptable, if not ideal, funds for everything except gold.  PRPFX seems to be available sometimes.

Food for thought: on one of the radio shows Browne mentioned that we could abolish the income and capital gains taxes, which would make 401ks/IRAs obsolete and eliminate all these hassles. 

[Liz L.]

The PP is a subversive way to wriggle past a carefully crafted system of cryptic wealth transference .

What Tex said.

Stone, that is a beautiful one-sentence summary of things.

[cowboyhat]

I agree that 401k offering rules should be addressed, particularly since employers now use 401k plans instead of providing pensions. I had the same thought that there must be some kind of kickback scam going on in some instances with these plans when I looked through the materials my wife's employer provided. They provided one money market fund and the rest were stock funds where the lowest fee was 1.5%. Basically it was a blueprint for a mugging.

The problem with reform is how much you shepherd investors into plans that implement the received wisdom about investing sensibly, and how much you let them make their own choices. The ugly truth is that most people make disastrous choices when left on their own, and most people who read this board probably agree that the received wisdom has some short comings. Puts you deep into philosophical thicket. Are you parochial and force everyone into a target retirement date fund, or do you leave the door open and let people burn themselves with foolish choices?

[stone]

cowboyhat, I think the whole saving for retirement enterprise is one big scam. The problem is what is the alternative? If government was stable and trustable, you could just pay more tax and trust that that would be reciprocated by the government paying out in 50years time direct from the treasury. That is how the UK military and civil service pensions work. If there was a system that allowed everyone to join such a military pension scheme then perhaps people would trust it because the state isn't going to screw the military. Our "national insurance" tax was (in the 1950s) supposed to be just such an idea (but with no link to military pensions ). As you can imagine it has been renaged on.

Dumb money is the feedstuff of the finance industry. They depend on inept pension saving.

[Storm]

I agree that 401k offering rules should be addressed, particularly since employers now use 401k plans instead of providing pensions. I had the same thought that there must be some kind of kickback scam going on in some instances with these plans when I looked through the materials my wife's employer provided. They provided one money market fund and the rest were stock funds where the lowest fee was 1.5%. Basically it was a blueprint for a mugging.

The problem with reform is how much you shepherd investors into plans that implement the received wisdom about investing sensibly, and how much you let them make their own choices. The ugly truth is that most people make disastrous choices when left on their own, and most people who read this board probably agree that the received wisdom has some short comings. Puts you deep into philosophical thicket. Are you parochial and force everyone into a target retirement date fund, or do you leave the door open and let people burn themselves with foolish choices?

My wife has one of those plans.  I'm pretty sure her company offers it because it's either free to them or there is some type of kickback.  The fees are excessive and there are no index funds.  The funds performance is generally terrible, as well.  It seems only the "stable value" or bond fund has any return other than negative, and it's return is around 1.x%

Still, we contribute to it, for one reason only:  tax-deferral.  It's still a good deal to accumulate money tax free, and if she ever leaves that job, we'll roll it over into an IRA and turn it into a PP.

[stone]

The curious thing is that everyone (almost) trusts the government to honor bond liabilities and yet it is thought impossible to trust the government to run a directly funded pension scheme for the population. Why? All the factors that mean that the government never needs to default on bonds also mean that the government would never need to default on a directly funded pension scheme.

[cabronjames]

The curious thing is that everyone (almost) trusts the government to honor bond liabilities and yet it is thought impossible to trust the government to run a directly funded pension scheme for the population. Why? All the factors that mean that the government never needs to default on bonds also mean that the government would never need to default on a directly funded pension scheme.

Great post.

The elite politician-media complex doesn't want to default on big T-Bond holders, like a Saudi sovereign wealth fund or Goldman Sachs.

They do want to default on the T-Bonds the Soc Security administration has, thereby defaulting on Average Jane Grandma.  Such recommendations is Orwellian-ly praised by the Village as Serious, Grownup, Courageous