Remaking Retirement Savings in America

I think a lot about retirement savings. I do retirement planning for individuals, I manage individual and family retirement portfolios, I recommend and manage retirement accounts for small businesses. I help individuals work with their CPAs and TPAs to determine the right retirement plan for them. I deal with salaried employees and independent contractors. Small business owners and 401(k) plan participants. Private sector and public sector employees. The consensus among all of these individuals and groups is that retirement savings in America is a mess. A total mess.

If you’re a business owner, you have an absurd amount of decisions to make about retirement plans. Should I offer a plan? Who does it cover? Should I do a SEP, SIMPLE, or 401(k)? Should it have a Roth provision? Should it have a loan provision? What formula for profit-sharing calculations should I use? What formula for matching contributions should I use? How does the match affect my ability to contribute as the owner? Do I have to make contributions every year? What is all of this going to cost me? What is my liability with each plan type and subsequent decision? How does having a retirement plan incentivize me to hire full time vs. part-time staff? Am I responsible for helping staff make investment decisions? To what extent?

Not only that, but we have different plans for private vs. public sector employees. Different plans for sole proprietors/independent contractors, small businesses and large businesses. Public sector employees often have to choose between 403(b), 457 and possibly 401(k) plans, and then choose different investment platforms within those plans! Plan participants in all markets have to figure out how to enroll, what to defer, Roth vs. pre-tax, and how to invest. Then they get a new job and leave a trail of legacy 401(k) accounts everywhere they go. Or worse, they have to figure out how to get that money out, how to get it into a new plan or an IRA and do so according to the rules so they don’t get hit with taxes and penalties.

This is stupid, people. It’s stupid. So here is my grand, sweeping, start-all-over-again plan for retirement savings plans. You ready?

Sever the link between employment and retirement savings. No more company retirement defined contribution plans. As of 1/1/2018, every SEP, SIMPLE, 401(k), solo 401(k), 403(b), 457, etc.  gets converted to the new American Retirement Plan (ARP). By default, every dollar in a workplace plan will get rolled into the Thrift Savings Plan into a target date fund according to the owner’s date of birth. The average expense ratio in the TSP for 2015 was 0.029%. Less than 3 basis points. Cheaper than Vanguard. Starting in 2018, there are no more workplace plans. If you do not want to invest in the TSP, you can open an ARP at every major brokerage in the country.

Your employer is only required to set up payroll deposits into the Thrift Savings Plan. If you want to make regular contributions to your brokerage ARP, it’s on you. The tax treatment is identical. You can make Traditional (pre-tax) or Roth (after-tax contributions). The current Defined Contribution dollar limit for annual contributions is $54,000, so that’s the new limit. There is no limit on what percentage of salary you can contribute. If you want to save half of your taxable income into the ARP, go for it. A self-employed person can currently contribute $54,000 to a SEP or solo 401(k), so we’re going to make that the limit for everyone.

Every small business, large business, school, hospital and municipality in the country is immediately relieved of the administrative headache of offering a retirement plan. No more fiduciary responsibility for the dentist, baker, mechanic and restaurateur who want/need to offer employees a 401(k) plan. Every person in the country who receives a W-2 is automatically enrolled in the ARP at the Thrift Savings Plan the day they get their first paycheck, starting with a 3% deferral and an automatic annual escalation, eventually to 10%. Everyone can opt out of this or increase the deferral rate, but auto enrollment is the default setting.

Now, if this ever happened, I would lose business. I manage several small business 401(k) plans that would be eliminated by this plan. Lots of Third-Party Administrators would suddenly go out of business. Tax planning with your CPA would be simplified. People who benefit from information asymmetry in an absurdly complex system, including myself, including people who sell insanely expensive annuity platforms to school districts, would lose their advantage. Small business owners and school superintendents and self employed individuals could go focus on their work instead of the tax code. What a world!

The odds of this ever happening are rapidly approaching zero. But a man can dream, right?

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