Forget the 401(k)

Several months ago the Wall Street Journal published a piece arguing that we need to create a new form of retirement plan. I love this idea for many reasons, though I disagree with the specific solutions provided in this piece. Below are the features the Journal promotes to improve the current system along with my perspective.

Universal Availability – as of 2017, private employers offered retirement-plan coverage to 66% of workers. The argument goes that it’s tough for people to save for retirement if their employer does not offer a retirement plan. While this sounds obvious, it also ignores the fact that saving does not require a government-approved “qualified” plan. There are plans currently available. They just may not be deemed worthy by the federal government.

Easy to Convert to Regular Income – we have been trained to focus on how big we can grow the number in our qualified plan, rather than think about how best to translate that into future income. Based on what we are all saving for (passive income years) this should have been the first, and biggest, feature of the “new” retirement plan. One suggestion refers to making the first $1,000 of income tax free to reduce the burden of converting the pile of cash to income. What if there was a way to make it all tax free?

Extended Retirement Income – how much money will you need to ensure you have income for life? That’s the proverbial million dollar question and the Journal offers up an example of a firm using annuities to help employees with their financial plan. The example is complex, but annuities can be a good option to solve this issue. Sadly, this product is not often included in qualified retirement plans. Another tough-love piece of advice is that people need to save more of their income during their active earning years. A minimum of 10% of your current income is a good place to start.

Account Portability – from 2004 to 2013, former employees abandoned roughly 16 million retirement accounts with balances of less than $5,000. The total funds amount to about $8.5 billion in retirement funds that have been orphaned. How could this be? Why would someone simply leave potentially thousands of dollars in a retirement account? The same reason employers struggle to set the accounts up in the first place. It’s a pain. Clearly there are plenty of people who have decided their time is better spent doing practically anything but navigating the steps to move money from one qualified plan to another.

Accounts Should be “Hard to Raid” – the Journal argues that the current qualified plan system is too easy to access when the cash is needed. While I will concede this is possible, I have a hard time with the argument for two reasons. First, this is money that was earned by the person saving it, so it’s theirs to do with as they please. Second, we have to treat savers as adults who are responsible for their own decisions. It may not be the wisest choice to withdraw money from a qualified plan and pay the 10% penalty, but that’s up to the individual. Adding extra “security” to the account to make it even more difficult for the owner to access their capital is something I cannot get behind.

So I agree with most of the general points presented by the Journal, and there is good news. A process and product capturing the benefits listed above is already available. In fact, what they describe can be found in a product many savers used prior to the invention of the almighty 401(k).

A properly designed Participating Whole Life Insurance Policy (PWLIP) allows you to save for your passive income years in a tax-advantaged policy, taking advantage of guaranteed returns and no management fees. All while having access to your capital if an emergency or an opportunity arises. These policies are not limited by your employer and are very flexible when converting to passive income during retirement. Contributions are also not limited arbitrarily by the IRS.

Please reach out with questions about how to take advantage of what a PWLIP has to offer. I look forward to talking with you.


If you would like to read the full WSJ report, click here.

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