Discussion of the Day: Mandatory 401K Participation

At a roundtable discussion the other day, a few of us raised this question "Should the U.S. Government pass legislation to mandate participation in Company sponsored Retirement plans (401K, 403B, etc)". QDIA Legisation was passed last November that allows companies to automatically enroll employees into their retirement plans and expand default investment options, but do you feel that expanding this to a mandated program would be a good option?

The theory behind this is requiring all U.S. employees 18 and older to contribute 1% of their pre-tax income to a 401K or Qualified retirement plan. In addition, their employer would be required to match that 1% dollar for dollar with fully vested dollars.

As it relates to the default investment option, the 1% would be invested into the most conservative investment such as a money market, cash equivelant, etc. The employee would be able to change this investment mix at anytime. The only stipulation to changing the alignment is that at least 10% of the overall portfolio value must remain in a conservative cash investment at all times(Again this is my theory).

During our discussion a good question was raised "Should the employee be allowed to access the funds on the account at anytime?" My response to that is that anything contributed above and beyond the mandated 1% could be used for a 401K loan, Withdrawal, etc. Even in the event of termination of employment mandated investment (principle and earnings) must be rolled over to another qualified retirement account. If the employee did not have one, one could be opened for them at the time of distribution. Now since retirement savings, under this theory, would be mandatory one could explore lowering the retirement age to 55 for example.

Another good question that was raised is "How would management fees be assessed?" The management fee associated with the mandated contribution would not be able tp exceed 10 basis points or .1%. Anything above and beyond that would be subject to standard management and expense ratio fees. This way costs are controlled at all times since individuals would be required to participate in the program.

There are many other aspects to discuss however this program could prove to be beneficial for all. One it would lower the number of senior citizens that are unprepared financially for retirement. Secondly, it would aim to build wealth amongst the middle and working class Americans. Next, it would also go to addressing rising concerns about the Social Security system and how young people nowadays will not be able to benefit from the program in the future. This program could potentially eliviate some of the pressures on Medicare as well since individuals should be in a position to take care of some if not all of their medical expenses. There still needs to be healthcare reform in this country, but generating wealth could be a step in the right direction.

If this were ever to become a significant topic of discussion, I assume there would be a lot of nay sayers, but how could one be against this plan? 1% of a person's pre-tax income is an amount that would more than like not be missed from the paycheck. It equates to $1 per $100 of earned income which would not set a household back. Will this strategy make millionaires, probably not, but it is a good start in the correct direction.