Rethinking 401(K)s

Abstract

In this Article, I argue that 401(k) plans make for bad public policy. The substantial tax subsidy upon which these plans are founded is allocated inefficiently and inequitably; many who could benefit from 401(k)s lack access to them; and those fortunate enough to participate are left ill-positioned to make wise financial decisions and withstand stock-market turbulence. To cure these ills, I recommend a replacement. This alternative would be similar to the 401(k) setup in that each investor would have a private investment account. But it would differ in three fundamental respects. First, unlike 401(k)s, everyone would have the opportunity to participate. Some individuals would be enrolled in the program by default, but would be free to opt out. Second, rather than provide a tax subsidy, the government would match a certain portion of the savings of lower- and middle-income earners. Third, this plan would include a default investment alternative that would provide participants with the potential for reasonable returns along with significant protection from down-side risk. By broadening access, reconfiguring the government’s financial support, and providing a thoughtful default investment, this reform proposal promises to remedy much of what ails our current approach.

Keywords: 401(K) plan, fairness, efficiency, tax incentive, government match, retirement, risk