Thursday, March 14, 2013

Some 401k Links

401ks have recently been a subject of interest to me. In particular, while I love the program conceptually, using a Federal tax benefit seems like a great way to leverage private dollars, increase the income security of seniors, provide low cost financing to US corporations, and provide individuals greater control of their financial assets all at the same time, it seems to have failed to achieve all of these goals.

Now, something I've said more than once is that properly doing social science means paying attention to observations and not getting led astray through deductive reasoning from shaky priors. In the case of 401ks, no matter how rock solid they seem conceptually there seems to be little data that people are actually behaving as predicted. Not being an economist I'm not going to investigate this at length but I'll be posting links as I come across them to back up this argument. Reading more on the topic is what has led me from being a big fan of the program, it seemed like a great way to change people's habits and lead to more efficient outcomes in the abstract, to feeling that it is a regressive waste of Federal money that hurts the poor and benefits primarily the well off.

This isn't to say that a different forced savings program that involved private accounts wouldn't work, that's a separate subject, just that programs structured like the current 401k don't seem to achieve the results that justify this tax preference.

[For now, this is crude and unsorted; pretty much anything I could find in places I usually look. I'll organize and update it later.],9171,1929233,00.html


  1. This is an off-the-cuff comment, because I am currently procrastinating on finishing up some work and don't have time to read any of your articles yet, but it seems that most of your critiques are not specific to 401(k) plans in general but to all tax-advantaged retirement accounts. The only thing unique about 401(k)s is that they are both employer-sponsored (with tax-free matching) and have a higher maximum contribution. Otherwise they operate in the exact same manner as Traditional IRA.

    1. Most of my critiques would apply to all US tax advantaged schemes, though 401ks have particular problems in that workers are limited to plans chosen by their employers which can involve significant conflicts of interest (see the articles on Wal-Mart). Also, many workers don't have access to 401ks, though this can be a problem across the income spectrum (my girlfriend does not have a 401k through her work, though we might be able to set up one as a sole-proprietor since they set up a separate accounting entity as a pass through for bookkeeping purposes; this sort of thing is another problem because it makes the whole thing inefficiently complex).

      On the whole, however, I see the entire program design as problematic at a time when we are talking seriously about cuts to Medicare, Medicaid, and Social Security. Relative to these programs there is far less economic justification for tax advantaging retirement accounts. The benefits flow almost solely to the upper quintile who savings aren't really sensitive to the tax advantage anyway. Employer contributions are nice but seem to have come at the expense of traditional pension arrangements which are generally better for workers. On the whole, I see the program as a failure that has undermined the retirement prospects of American workers and primarily succeeded in transferring wealth to fund managers (just because there are great funds like Vanguard doesn't mean most workers have access to them or the sophistication to choose them) and owners of capital.

      Though again, many benefit from these programs, myself included. I wouldn't mind maintaining them in an environment without budget pressures but compare cutting the 401k subsidy to just about anything else being cut and the 401k looks like a loser.

      Other schemes used internationally may work better, such as mandatory forced savings schemes with guaranteed minimum returns; especially if there is a mandatory low cost government option providing program discipline and protection for the unsophisticated. But we don't have a scheme like that in the US, and even weighed against other budget priorities I find it a difficult tax advantage to defend. Though less so than the mortgage interest deduction (which should be replaced with a general housing credit which would apply to renters as well).

  2. One thing I have noticed is that, every time I go to Personnel (or Human Resources, or whatever whacky label it goes by locally) to sign up, I get the same reaction. I opt for the maximum amount that will get matched, and they act like I'm a total anomaly. Why would anybody fail to take what amounts to a pay raise? And yet they do.

    OK, I can see someone living on the edge of poverty not being able to afford their side of the matching allocation. But I'm talking about software engineers with 6 figure salaries. And yet, apparently most people either pick a lower level, or don't bother to opt in at all.

    Anyone who says that people make rational economic choices, and bases their economic models on that premise, needs to seriously reexamine their assumptions.

    1. I've seen that too. Doesn't make much sense to me either. Yet another reason why it is an inefficient program as currently implemented.

  3. 401k's started off as a tax dodge for the Rich. Then, before you know it every business in america has one. You know if you ask a Farmer if he would rather pay taxes on the Crop or the seed? 100% of them would say the seed. When a person puts money into a 401k, they are paying taxes on the crop. Time Magazine published a very interesting article "Why it's time to Retire the 401k" you can find it here,9171,1929233,00.html
    We offer a Free download of a E-Book written by Patrick Kelly "The Retirement Miracle" excellent book a must read,