John Rekenthaler, Vice President of Research at Morningstar, published an article this January 2020 entitled, “401(k)s Have Reached Their Expiration Date ” in which he joins a number of critics of current retirement plans claiming:

The 401(k) structure is deeply unpopular with most investment writers, who regard it as a patchwork scheme that permits companies to foist their retirement-income risks onto employees. …

As originally created, 401(k)s could never serve as the nation’s mainstream retirement system. A scheme that is disseminated through self-education appeals most strongly to those who need the least assistance: the company’s highest-paid workers. The masses, very often, are left behind.

This obstacle shouldn’t have been a surprise, as 401(k) plans were not invented to serve the general public, being instead supplemental tax-avoidance schemes for the privileged.

The idea that companies are “foisting” retirement income risks onto employees assumes, quiet wrongly, that the responsibility for your retirement rests with your employer. It does not.

There is no corporate or national retirement system. There is only your retirement plan. No one other than you is responsible for your retirement. There are multiple options of saving or pooling your longevity risk but your participation in or reliance on these systems is at your discretion. You and you alone are responsible.

Furthermore, to call retirement plans a “scheme” is highly pejorative. The 401(k) plan was not invented to serve anyone. It was not really invented at all.

And to say that a tax-sheltered vehicle assists the privileged is a tautology. Any tax-sheltering vehicle will be of the most benefit to those who would otherwise pay the most in tax.

His conclusion, “Today’s 401(k) structure must go,” shows the hubris of a centralized planner. He proposes removing an option that is working for more than 80% of the country based on the mistaken belief that he knows better.

Rekenthaler’s criticisms vary, but for the most part they stem from these three observations:

1. Participation can be boosted by auto enrollment, but it can’t be boosted to 100%.
2. Many employees take early withdrawals, negating the benefit of participation.
3. Many smaller firms do not offer a retirement plan.

Here are my comments on each of his observations.

Participation can be boosted by auto enrollment, but it can’t be boosted to 100%.

It seems that Social Security already has everything Rekenthaler wants. It has 100% participation, you can’t take anything early, and every firm participates.

We already have mandated that people participate in Social Security, saving 12.4% of their salary. Alas then, the government spent our contributions on our parent’s and grandparent’s benefits rather than allowing us to save towards our own estate.

The current government-mandated retirement plan is broken, but Social Security can be saved. If it were saved, we would all be retiring as millionaires.

Rekenthaler proposes yet another mandated retirement plan. However, he should start with an analysis of why our current mandated system isn’t working properly for anyone before he proposes tearing down the privatized system which is working for 80% of the country.

Everyone should be saving for retirement, and yet people don’t. What are you going to do about it? No matter what you do, if the program is voluntary some large portion of the population won’t participate. And to make yet another system mandatory risks even more of our wealth to a system which is keeping many of us impoverished but should be allowing all of us to retire as millionaires. At the end of the day, that decision should be their choice.

Many employees take early withdrawals, negating the benefit of participation.

Employees take early withdrawals because they have unexpected financial shocks. The answer is for most employees to have a monthly emergency budget allocation, but they don’t.

If you wanted to solve the problem of early withdrawals, you would mandate that employees set aside some of their salary for emergencies. However, some employees would spend the money on non-emergencies. So you’d have to regulate when the money could be spent, perhaps with a forced budget counseling session, by creating a government emergency disbursement agency, or issuing hard penalties for taking out the money for any other reason.

However, there is no one-size-fits-all budget. Some families would be wounded by the forced savings. Others the mandated defaults wouldn’t be enough and they would still be hurt by financial shocks.

Any external mandated solution to someone’s lack of savings is too heavy handed. If you are going to try to “solve” a savings problem through government mandate, you are going to have to save people from their own bad behavior.

Rekenthaler’s solution is to “replace early withdrawal tax penalties with a stronger deterrent.”

All his solution would do though is remove the only emergency fund low income families have, their retirement program. With no such fund, families would simply borrow emergency money on credit cards or other options which are worse than the tax penalty imposed on retirement plan withdrawals.

Rekenthaler’s suggestion is a heartless solution which gives families who need money one less option to solve their immediate problem. In a follow up article, he suggests that we copy Australia’s hardship exceptions and “think no more of the matter .” None of Australia’s exceptions are the reasons why people actually need an emergency fund.

He should consider if his retirement savings priority is really more important to the single mother whose income depends on getting her car fixed in order to go to work. Placing a “stronger deterrent” wounds that worker. The decision of whether it is the right time to spend that money isn’t his decision to make. It is hers.

Many smaller firms do not offer a retirement plan.

Many firms do not offer a retirement plan. Rekenthaler’s suggestion is to “remove the employer from the system.” My suggestion would be to remove the government from the system.

Retirement plans are more complex and costly than they need to be partly on account of the compliance costs of government regulation. Rekenthaler is correct that plans should be portable across employers. The SECURE Act takes a small step in that direction, allowing multiple employers to participate in the same plan. But the act retains a host of compliance burden that still must be handled at each employer separately. These government rules still limit how portable a retirement plan could be.

The entire 401(k) system came about when Ted Benna interpreted a loophole in the Revenue Act of 1978 and setup a fund for employees to fund accounts with pre-tax dollars and matching contributions. The government did not set out to craft legislation that was helpful. In fact, the government has been fighting such plans since the 1950s. Any talk about “improving on them” sounds like code for “making them less valuable to those rich folks who are actually using them.” As Ronald Reagan once said, “The most terrifying words in the English language are: I’m from the government and I’m here to help.”

Those families with a high standard of living require a large amount of assets in order to continually support their standard of living in retirement. If retirement plans benefit wealthy families, it only compensates a small amount for the progressive tax system.

Government taxation eats most of the growth when workers try to save money in a taxable brokerage account. Avoiding or deferring taxation is worth hundreds of thousands of dollars to ordinary workers and, on account of our progressive tax system, worth millions of dollars to above average income families. Most of the problems with current retirement plans stem from the government wanting their share early in the form of taxes. Trusting government to build a better system is something with which Rekenthaler obviously sympathizes, but he does so without any historical evidence.

If the government would stop taxing capital gains, retirement money would not need to be in a tax-sheltered account. As it stands now, the capital gains tax unfairly taxes government-induced inflation. As long as tax-advantaged accounts are worth so much money, I for one will be in favor of fighting for them.

Rekenthaler’s New American Retirement Plan

In a follow-up article, Rekenthaler describes “The New American Retirement Plan .” His description of the primary benefits:

The solution to all these problems is straightforward: a single national retirement plan, shared by all workers.

When Rekenthaler suggests that “one single national retirement plan” is “the solution to all these problems” he shows a centralist planner’s perspective. As we suggested in our article, “The Delirious Happiness of Free Market Choice“:

The anointed march into an industry and lob regulations, restrictions, incentives and laws to force providers and consumers into what they believe will be the one best system for all. To the anointed, government is a tool best used to conform citizens to their uniform societal ideal.

Thanks to Moskowitz, we now understand variability. We now realize there isn’t just one best mustard. We each have a best mustard like Dijon, yellow, and honey. This embracing of variability contributes to the libertarian ideology that freedom is the ability to choose as you see fit and specialization is highly desirable.

Proposing only one social solution creates trade-offs that leave many people’s needs unmet. Putting “for all” after anything provides a more impoverished society. Free choice in a free market allows each of us to pursue happiness. This is the type of diversity that is essential to happiness.

Rekenthaler suggests that “the need for one defined-contribution plan rather than many is overwhelming.” But this suggestion makes no sense. If one plan solves the need, multiple plans that provide more options only solve it better. Taking away options cannot solve “the need” better. Logically providing “a single path” is never advantageous to those whose options are being eliminated.

It isn’t clear exactly what Rekenthaler means by “one single national retirement plan” but I think the key word is “national” meaning that it would be run and regulated by the government. Rekenthaler suggests:

Expecting companies to sponsor retirement plans is like demanding that a dog dance; it may comply, but neither well nor happily. Companies run businesses. That is what they are created to do.

But expecting government to sponsor a national retirement plan is much worse. Without competition, government agencies have the highest costs, worst service, no innovation, and no possibility of creative destruction.

Rekenthaler claims “A plan that meets the needs of one sponsor’s employees will also meet the needs for the next.” But what should be done if the government’s solution does not meet someone’s needs? Where is the competition that allows people to choose for themselves?

He suggests that we “might as well command that each American company investigate the boiling point of water.” But the boiling point of water is an excellent example of there not being a one-size fits all solution. The boiling point of water is 212º Fahrenheit at one atmospheric pressure. In Denver, the mile-high city, the boiling point of water is 201.5º Fahrenheit giving rise to cookbooks explaining how to adjust your cooking and baking at high altitudes. Pasta, rice, and eggs all have to be cooked longer because they are being boiled at a lower temperature. As the website “The Spruce Eats ” suggests:

Boiling isn’t the only thing you need to pay attention to. Each method of cooking, type of ingredients, and a combination of ingredients may require different tweaks to compensate for high altitude. … There is no one high altitude solution.

If there isn’t one solution for something as simple as boiling water, how does Rekenthaler expect his one government-run national retirement plan to satisfy more people than the competition of the free markets?

Why not Roth IRA?

Everything Rekenthaler wants from a retirement plan is currently available in a Roth IRA.

A Roth IRA is not sponsored by a company. It is owned by the worker who contributes toward it. There is no waiting period to contribute to a Roth IRA. It is portable across employers.

As an additional benefit, money contributed to a Roth IRA can be withdrawn by the owner at any time without penalty. This makes it an ideal place to put an emergency fund as well as retirement savings.

If the government simply raised the annual contribution limits for Roth IRAs, they would be as beneficial as a 401(k) retirement plan. This would mean that there is no need to create a single government agency. Furthermore, neither the government nor the employer would not need to know how to be a custodian or a financial advisor.

Summary

I assume that Rekenthaler has the best of intentions. He is trying to, as he puts it, “deter foolishness.”

He believes that he needs to take choices away from 80% of the country in order to save 20% of people from themselves. He thinks their actions “make no long-term sense” simply because he can’t envision them wanting a car and taking money out of their retirement plan to pay for it. It is a fatal conceit.

Rekenthaler mocks those who have diligently saved and discounts the good produced for them by the current system.

Thinking that government can craft a complete list of exceptions where people are allowed to take money from a retirement plan is a utopian dream. Some people, maybe even a lot of people, will be hurt by the decisions.

Rekenthaler’s proposed narrowing of choices to a one-size fits all national solution provides a poor substitution for our current choices.

Photo by Aditya Chinchure on Unsplash