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I don’t understand why 401k even exists. The money should go into an IRA controlled by the owner. The employer should have no say in this. The same should go fo

I don’t understand why 401k even exists. The money should go into an IRA controlled by the owner. The employer should have no say in this. The same should go for health insurance....

lotsofpulp 7y ago
It exists to give large employers who can afford to pay for administering those benefits an advantage over smaller employers. Same for health insurance.
- Accujack 7y ago
  It's not so much an "advantage over smaller employers" as it is a "subsidy for large employers" or a "way to spend less money to offer the same benefits so profits are higher".
  - lotsofpulp 7y ago
    That is one and the same. The subsidy for large employers is not available to small employers, hence an advantage for large employers.
    - Accujack 7y ago
      True, but you're implying it has something to do with competing. It's not that, it's just about spending less money so they get to keep more.
- Ididntdothis 7y ago
  In addition probably also a subsidy for the financial industry.
- unicornmama 7y ago
  Maybe this made sense in 1978. But we are now in an era of zero fee trades, index funds, and microscopic management fees.
  - lotsofpulp 7y ago
    I am alluding to the 401k contribution limit being $20k+ versus the IRA contribution limit being $6k. There is absolutely no reason why one should differ from the other, other than one benefits those who have employers that offer 401k. In fact, couples where one spouse who works for an employer with a 401k and one who doesn't are actually punished by lowering the contribution limit for IRA to zero. Someone explain to me why that was put into law. https://www.investopedia.com/401-k-vs-ira-contribution-limits-4770068 https://www.investopedia.com/401-k-vs-ira-contribution-limit...
    - Ididntdothis 7y ago
      It’s pretty crazy that employers have any power over things like health insurance or retirement savings and play by different rules. These should be completely disconnected from employment. The only thing employers should compete on is things like 401k matching.
      - frockington1 7y ago
        My employer subsidizes my health insurance and contributes to my 401k and a pension. It's a nice perk and part of the reason why i work for them. It's a win-win
        Ididntdothis 7y ago
        They can subsidize as much as they want. But they receive tax benefits that are not available to people whose employer doesn’t do this. In addition they choose health insurance and 401k providers for you. I am pretty sure their incentives and yours aren’t aligned so you may actually get a bad deal. It simply makes no sense.
        frockington1 7y ago
        I'm not trying to be dense, I don't understand why this doesn't make sense. My employer offers salary, insurance, bonus, perks etc. and others do the same. I look at my options and take the offer I value the most. What part of the contract doesn't make sense? Most contracts have two parties with different incentives
sebasmurphy 7y ago
And even if it does. I don't really see the reason that I should be locked into the employers 401k and not be able to choose my own.
toomuchtodo 7y ago
401ks should not exist. IRAs should support the same contribution limits, with funds deposited in the same way payroll is done. This would be extremely beneficial to everyone saving for retirement, as fees would be driven down due to the ability to shop your account around, and there is zero friction in opening an IRA compared to your employer needing to sponsor and support a 401k plan. Support retiring 401k legislation. Call your representatives.
harikb 7y ago
Edit: See jlmorton's correction below. Creation was indeed accidental. Leaving my comment unchanged. When 401k-s originally started, it was considered ground-breaking in that it was a way for employers to use their purchasing power (or choosing power) to get lower cost management of funds. It was envisioned as a great thing for employees and employers. But we all know that is now how new laws are created. A bunch of lobbyists from financial sector lobbied to create this new instrument, which in turn directs more money to them. Any instrument where the employee doesn't get to control the management of the money is bad for the employee. There is a similar situation with FSA (Flexible Spending Account). That is day light robbery. Employee has to guestimate how much medical expenses they have in the year. Estimate too little and you lose the tax savings. Estimate too much and the FSA management organization keeps the unspent money. What was originally deducted from your paycheck doesn't come back to you with a 10% additional penalty. No, the person loses 100%. FSA says the money goes to the employer to offset the management costs. This is like the real-estate sales person claiming the seller is paying them.
- Ididntdothis 7y ago
  I agree about FSA. It’s stupid in every conceivable way. But don’t they roll over now? At least to some degree.
  - lotsofpulp 7y ago
    They added 2.5 months to be able to use it, if the employer wants employees to be able to. Still useless for the same reasons though. https://www.irs.gov/newsroom/irs-plan-now-to-use-health-flexible-spending-arrangements-in-2019 https://www.irs.gov/newsroom/irs-plan-now-to-use-health-flex...
  - nimajneb 7y ago
    As far as I know it's Health Savings Account (HSA) in a high-deductible health insurance plan that rolls over, not a FSA.
  - pnutjam 7y ago
    No, your probably thinking of HSA's or the fact that you have something like 30 or 60 days into the new year to use the old one.
jlmorton 7y ago
It exists as a historic accident. It was not originally intended as a retirement savings program, but simply a way to help a small number of rich people avoid tax on deferred income invested in the stock market. Though the program has become widely popular, it's still very clearly a giveaway to the rich. Not only are the wealthy capable of saving a larger amount, we also allow their employers to contribute up to $56,000. Obviously, most employers are not going to contribute $56,000 to their employees retirement savings plan. Up to 80% of the tax expenditure of 401k plans is captured by the top quintile of income earners. The plans amount to welfare for the wealthy, and indeed the government loses more revenue from these tax expenditures than it spends on many welfare programs like food stamps.
- darawk 7y ago
  This is a very strange interpretation. Lost revenue relative to what? Not having it? Is the government losing revenue by not taxing the bottom 50% of income earners, too? The tax code is structured this way to incentivize saving for retirement. Social security exists for the same reason. The government allows you to defer taxation in these structured vehicles so that you are better able to care for yourself in your old age, so that the government doesn't end up footing the bill. These accounts are no more a "give away" to the rich than the progressive income tax schedule is a "give away" to the poor.
  - lotsofpulp 7y ago
    >These accounts are no more a "give away" to the rich than the progressive income tax schedule is a "give away" to the poor. Since only the rich are employed by employers who offer the benefits of these accounts, it is effectively a give away to the rich. If it wasn't a give away restricted to a certain populace, then it would be de-linked from employment and available for everyone.
    - grimjack00 7y ago
      > Since only the rich are employed by employers who offer the benefits of these accounts So, being an employee of a company that offers a 401k is the new definition of "rich"?

I don’t understand why 401k even exists. The money should go into an IRA controlled by the owner. The employer should have no say in this. The same should go for health insurance....

lotsofpulp 7y ago

It exists to give large employers who can afford to pay for administering those benefits an advantage over smaller employers. Same for health insurance.

Accujack 7y ago
It's not so much an "advantage over smaller employers" as it is a "subsidy for large employers" or a "way to spend less money to offer the same benefits so profits are higher".
- lotsofpulp 7y ago
  That is one and the same. The subsidy for large employers is not available to small employers, hence an advantage for large employers.
  - Accujack 7y ago
    True, but you're implying it has something to do with competing. It's not that, it's just about spending less money so they get to keep more.
Ididntdothis 7y ago
In addition probably also a subsidy for the financial industry.
unicornmama 7y ago
Maybe this made sense in 1978. But we are now in an era of zero fee trades, index funds, and microscopic management fees.
- lotsofpulp 7y ago
  I am alluding to the 401k contribution limit being $20k+ versus the IRA contribution limit being $6k. There is absolutely no reason why one should differ from the other, other than one benefits those who have employers that offer 401k. In fact, couples where one spouse who works for an employer with a 401k and one who doesn't are actually punished by lowering the contribution limit for IRA to zero. Someone explain to me why that was put into law. https://www.investopedia.com/401-k-vs-ira-contribution-limits-4770068 https://www.investopedia.com/401-k-vs-ira-contribution-limit...
  - Ididntdothis 7y ago
    It’s pretty crazy that employers have any power over things like health insurance or retirement savings and play by different rules. These should be completely disconnected from employment. The only thing employers should compete on is things like 401k matching.
    - frockington1 7y ago
      My employer subsidizes my health insurance and contributes to my 401k and a pension. It's a nice perk and part of the reason why i work for them. It's a win-win
      - Ididntdothis 7y ago
        They can subsidize as much as they want. But they receive tax benefits that are not available to people whose employer doesn’t do this. In addition they choose health insurance and 401k providers for you. I am pretty sure their incentives and yours aren’t aligned so you may actually get a bad deal. It simply makes no sense.
        frockington1 7y ago
        I'm not trying to be dense, I don't understand why this doesn't make sense. My employer offers salary, insurance, bonus, perks etc. and others do the same. I look at my options and take the offer I value the most. What part of the contract doesn't make sense? Most contracts have two parties with different incentives

sebasmurphy 7y ago

And even if it does. I don't really see the reason that I should be locked into the employers 401k and not be able to choose my own.

toomuchtodo 7y ago

401ks should not exist. IRAs should support the same contribution limits, with funds deposited in the same way payroll is done. This would be extremely beneficial to everyone saving for retirement, as fees would be driven down due to the ability to shop your account around, and there is zero friction in opening an IRA compared to your employer needing to sponsor and support a 401k plan. Support retiring 401k legislation. Call your representatives.

harikb 7y ago

Edit: See jlmorton's correction below. Creation was indeed accidental. Leaving my comment unchanged. When 401k-s originally started, it was considered ground-breaking in that it was a way for employers to use their purchasing power (or choosing power) to get lower cost management of funds. It was envisioned as a great thing for employees and employers. But we all know that is now how new laws are created. A bunch of lobbyists from financial sector lobbied to create this new instrument, which in turn directs more money to them. Any instrument where the employee doesn't get to control the management of the money is bad for the employee. There is a similar situation with FSA (Flexible Spending Account). That is day light robbery. Employee has to guestimate how much medical expenses they have in the year. Estimate too little and you lose the tax savings. Estimate too much and the FSA management organization keeps the unspent money. What was originally deducted from your paycheck doesn't come back to you with a 10% additional penalty. No, the person loses 100%. FSA says the money goes to the employer to offset the management costs. This is like the real-estate sales person claiming the seller is paying them.

Ididntdothis 7y ago
I agree about FSA. It’s stupid in every conceivable way. But don’t they roll over now? At least to some degree.
- lotsofpulp 7y ago
  They added 2.5 months to be able to use it, if the employer wants employees to be able to. Still useless for the same reasons though. https://www.irs.gov/newsroom/irs-plan-now-to-use-health-flexible-spending-arrangements-in-2019 https://www.irs.gov/newsroom/irs-plan-now-to-use-health-flex...
- nimajneb 7y ago
  As far as I know it's Health Savings Account (HSA) in a high-deductible health insurance plan that rolls over, not a FSA.
- pnutjam 7y ago
  No, your probably thinking of HSA's or the fact that you have something like 30 or 60 days into the new year to use the old one.

jlmorton 7y ago

It exists as a historic accident. It was not originally intended as a retirement savings program, but simply a way to help a small number of rich people avoid tax on deferred income invested in the stock market. Though the program has become widely popular, it's still very clearly a giveaway to the rich. Not only are the wealthy capable of saving a larger amount, we also allow their employers to contribute up to $56,000. Obviously, most employers are not going to contribute $56,000 to their employees retirement savings plan. Up to 80% of the tax expenditure of 401k plans is captured by the top quintile of income earners. The plans amount to welfare for the wealthy, and indeed the government loses more revenue from these tax expenditures than it spends on many welfare programs like food stamps.

darawk 7y ago
This is a very strange interpretation. Lost revenue relative to what? Not having it? Is the government losing revenue by not taxing the bottom 50% of income earners, too? The tax code is structured this way to incentivize saving for retirement. Social security exists for the same reason. The government allows you to defer taxation in these structured vehicles so that you are better able to care for yourself in your old age, so that the government doesn't end up footing the bill. These accounts are no more a "give away" to the rich than the progressive income tax schedule is a "give away" to the poor.
- lotsofpulp 7y ago
  >These accounts are no more a "give away" to the rich than the progressive income tax schedule is a "give away" to the poor. Since only the rich are employed by employers who offer the benefits of these accounts, it is effectively a give away to the rich. If it wasn't a give away restricted to a certain populace, then it would be de-linked from employment and available for everyone.
  - grimjack00 7y ago
    > Since only the rich are employed by employers who offer the benefits of these accounts So, being an employee of a company that offers a 401k is the new definition of "rich"?