Obama must loosen grip on company retirement plans

The retirement system in the United States is in chaos.

Government retirement vehicles are grossly underfunded, most companies have dropped their defined benefit pension plans, and for those fortunate enough to have a 401(k), the savings and investments are at the mercy of their employer's plan administrator.

Our nation's approach to retirement is ripe for change, and it would be inspiring to see the president or Congress offer some viable alternatives.

Yet instead, just last year, President Obama delivered a speech in which he cited brokers as part of the reason why baby boomers are not retirement ready. To compound matters, the president just recently encouraged the Department of Labor to push for more rules and regulations on the financial brokers and advisors who provide employer-sponsored 401(k) plans.

This is the complete opposite of the direction we should be taking.

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Rather than merely tinkering with our current system, I think it's time for drastic measures. I believe the time is right to "decouple" retirement savings from our employers.

Financial Freedom
Jan Stromme | Getty Images

Case in point, if we step back and think about this from a logical standpoint, does it really make any sense to tie our retirement savings to our employers?

Our employers already provide our wages and, in most cases, our health coverage, as well. Why have employers been cast in the position of not only telling their workers how to invest their retirement dollars but of serving as the retirement-plan administrators as well?

Free to invest

The entire approach is not only absurd, it also begs the question: When did we become so fragile?

Don't get me wrong; I'm a devoted fan of many of the benefits that 401(k) plans provide. The greatest of which is not the tax savings, which is fine, but rather the pretax money that is deducted from a contributor's paycheck before he or she has the option to spend it (or be taxed on it).

This is nearly painless savings and a convenient and effective vehicle available to a majority of us.

Yet the downside is that the current system does not allow an employee any freedom. It does not allow the employee to invest his or her own saved dollars how he or she sees fit.

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Instead, employers throw together a limited menu of investment options, and the employee is left with very little choice. There's no option to choose a favorite investment company or a trusted relative or friend, nor is there the option of hiring an advisor.

Let's be frank, here: When it comes to modern retirement plans, you and I are pretty much at the mercy of our employers.

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Just this week I was on an evening run with an acquaintance who is a few years away from retirement. Quite coincidentally, he was actually complaining to our running group about the limited options within his 401(k) plan. He said he wanted to hire someone to help him with his financial planning and manage his 401(k) account—to help him maximize his savings—but because his 401(k) plan was legally tied up and restricted, no advisor would agree to take him on as a client.

The fact is that when most people retire, they take their 401(k) and roll the money into an IRA.

But why do they do this? Primarily, so they can have a personal, local advisor help them not only manage their retirement dollars but help them with a comprehensive retirement strategy.

Cramer: 401(k) or IRA?
Cramer: 401(k) or IRA?   

Make no mistake: The system is not the fault of the employer.

Employers, for their part, are stuck between a rock and a hard place, especially when it comes to their 401(k) plans. They typically offer the plans to be competitive in the marketplace and to add a benefit for their employees, but they are simultaneously forced to operate in the midst of the rules and regulations of the Department of Labor.

It's almost impossible to achieve balance between pleasing their employees while simultaneously making certain—or trying to, anyway—that the Department of Labor doesn't decide to audit their plan and not only make their lives miserable but threaten the very survival of their business.

A better approach to the 401(k) would be to loosen the government's grip and to give employees the option of directing their savings to an investment firm of their choosing. The employer could and should simply act as a conduit and transmit the employee's deductions to whatever firm the employee selects, much like what happens today with Health Savings Accounts.

More government is rarely the answer.

"It is time we allow the people who are actually saving for their own retirement to decide what is best for themselves."

To take it one step further, why not allow folks to contribute the same dollar amount to any type of retirement plan, whether it's a 401(k) plan or an IRA? The current system is unnecessarily restrictive in that if you have a 401(k) offered to you but choose not to participate, it can limit your ability to make a deductible contribution to an IRA.

In other words, if you contribute your retirement savings to your employer-sponsored, government-monitored plan, you can get a tax deduction. But if you bypass Big Brother's plan and invest in your own IRA, you lose the tax deduction.

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That is ridiculous on every level.

It is time we allow the people who are actually saving for their own retirement to decide what is best for themselves. It's time to limit the power and influence of the employer, the Department of Labor and our elected officials. It's time to place the control of our futures, and of our retirements, back in the quite capable hands of the American people.

—By Scott Hanson, senior partner and founding principal of Hanson McClain