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Comment by logicalmind | Hacker News Reader

Tangential question, but is anyone else worried that the rules of 401(k)'s can be changed at a later time. History has shown that retirement funds are highly valuable sources of money that companies and governments eventually eat away at. Pensions funds were eventually raided by companies. And social security has been used for alternate means by the government. Is there anything that prevents the government from changing the rules of 401(k) plans at a later time that allow them to be misappropriated as well?

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I am not a financial professional so hopefully someone else will chime in, but...

My understanding is that your 401k can't be pilfered directly by the government since they don't hold it. This is different from pensions where the company actually held the pension money and changing the terms led them to actually take it.

The government CAN get at your 401k money using the same technique you are calculating against with respect to ROTH accounts. That is, since it is tax deferred, you're essentially betting that you'll be in a lower or at least equivalent tax bracket compared to current when it comes time to pull that money out.

It's conceivable that they just up the tax rates enough that when it comes time to pull your money, the government can get at as much of your funds as it likes based on taxes alone.

I'm sure there are other risks involved, but that seems like the most obvious.

Since the 401(k) laws are federal laws within the IRS, couldn't that law be changed at any time by the federal government? Based on history, it seems naive to think that trillions of dollars sitting in retirement accounts would not be eventually re-purposed.

They have the theoretical power, but how do you think "we're taking your retirement accounts" is going to play politically?

It was possible with pensions because they often weren't privately held accounts, and people didn't have individual balances they could consult.

How is that any different from social security though? Social security taxes are being taken out of every american's paycheck as we speak. Yet, anyone under the age of 40 or so has no illusions that social security will be solvent by their retirement age.

It's possible because you don't have a Social Security balance. There's no statement that says "you personally have $250k in your account" like a 401(k) or IRA does. So, no one notices when Congress goes fishing in it.

Frankly, I (34) do think it'll be solvent by my retirement. It'll still have funds to pay about 3/4 of current benefits without changes to the system. As it gets closer, political change will likely get easier as Congress doesn't want lose their cushy jobs en masse.

I actually get a letter from the government every year showing how much money I have put into the social security trust, and how much I can expect when I retire if I keep putting in the same amount as I did last year.

You can view it online anytime here, actually: https://www.ssa.gov/myaccount/

Ultimately since it's a huge trust fund of course there's no "You have X money in the bank", but it does say I should expect "X money per month" when I retire. It'd be nice if it showed details of the trust fund overall.

I get those too. Note that nowhere does it claim the amount you paid in is your balance. Your benefits won't go up if you retire at 100 years old. Your benefits won't run out if you live to 500. It's not like a 401(k) or IRA, where you have $x dollars in it that's your money and have to budget your withdrawals.

They won't update the "amount you will get" to reflect Congress dipping into the fund. The statements operate on the "if everything continues to go well" basis, and so what Congress does isn't reflected on them. No one gets their next statement and asks "hey, where'd my money go?"

That's why it's politically safe to raid, at least in the short term.

> They won't update the "amount you will get" to reflect Congress dipping into the fund. The statements operate on the "if everything continues to go well" basis, and so what Congress does isn't reflected on them.

Right.

They do say, "Your estimated benefits are based on current law. The law governing benefit amounts may change. Congress has made changes to the law in the past and can do so at any time." At least.

I think it'll be solvent one way (reduced benefit or increased benefit age) or another (increased tax rate on workers) by the time I'm 62.

Another possible way is means testing. If you've saved enough for retirement on your own, you don't get social security. Personally I think this scenario is one of the more likely ones.

I hope not. One would have to exclude benefits to a lot of people who have been paying the top tax rate for SS to save any significant amount of money. In effect, this would be a retroactive tax. SS has never been a means tested program.

See also:

> Social Security benefits are relatively evenly distributed among retirees. The vast majority of benefits go to people who are low- or middle-income by any standard. This means that a means test that is focused on taking back benefits from upper income retirees is likely to raise very little money...

> This suggests that means testing is not an effective route for reducing the cost of Social Security.

Source: http://cepr.net/documents/publications/ss-2011-03.pdf

You raise a very good point that means testing wouldn't save very much money unless the cutoff was very low and cut into middle-income retirees.

So perhaps my guess about this is wrong. It just seems so politically easy though. "Why should millionaires get SS benefits while the middle-class suffers?" is a good sound bite.

It will likely be a net drain on the budget, but it's highly politically unviable to stop payments altogether.

One way to think of the Social Security fund is that it is invested in one of the safest instruments in the world: loans to the US government backed by their "full faith and credit".

What's going on is that the tax-cut crowd is hoping to default on those loans so their taxes don't have to be raised to pay it back. Part of their political strategy is convincing young people that the fund will disappear for unexplained reasons, or that it's not really a fund. It's part of a long-term, multi-generational plan to transfer tax burden from the wealthy to the <$100k crowd that started with Mr. "lower taxes" Ronald Reagan increasing the SS tax.

"They have the theoretical power, but how do you think "we're taking your retirement accounts" is going to play politically?"

How did "we're showing up to physically seize all of your gold" play out ?

https://en.wikipedia.org/wiki/Executive_Order_6102

"We're exchanging something worth money for money" plays a little differently than "we're taking some of your money".

Changing the law would mainly affect older people. And older people vote in very high percentages. Politicians are very, very careful about doing things that will make older voters angry.

This doesn't make sense to me. The entire point of Roth is that you pay tax up front, and then the retirement proceeds are tax-free (assuming you withdraw after proper age, etc.). To then go and tax these withdrawals is basically neutering the entire Roth deal - I think there would be some pretty major political backlash on that.

What is the percentage of Americans with assets in a Roth IRA compared to the number of Americans who would rather see someone else pay for a tax increase? Politically, altering the deal on Roth IRAs could work out quite well.

I don't know the answer to that, or about Roth 401(k) plans, but I think there are a lot of people overall with one or the other. I think that threatening either would have an effect similar to threats on Social Security, without the justification of it being insolvent.

IMO, at worst, Roth plans could get phased out for new contributions with existing deposits and the tax-free withdrawals honored.

Roth 401k and Roth IRA are taxed now (it is post-tax income you contribute). Traditional 401k is taxed when withdrawn. I believe you have it backwards.

You effectively can't stop political risk - though they don't normally change it retroactively

Having said that the tax benefits are not that great in the US - Higher rate tax payers in the UK have faced savage cuts to the tax benefits. In some cases older doctors/ headteachers have to retire early as they would hit the life time cap if they went to 65

The rules for 401(k) will no doubt evolve over time, within the same legal / political protections and risks as anything else. Although I wouldn't be worried about outright appropriation, it's quite possible a modest tax could be introduced, then then rise over time - who knows what could happen over 30 or 50 years.

This, and the administrative overhead and inflexibility of 401(k) plans, 529 plans, health savings accounts, etc make me steer clear where practical. I use my employer's 401(k), contribute the amount needed to get the full match available, but that's it.

Beyond that, I'd rather pay my income tax up-front at the going rate instead of at some mystery future rate, and keep my savings and investments as unencumbered as possible.

Employers can offer Roth 401(k)s, in which you pay the tax upfront but still get the advantages of tax free gains.

>Beyond that, I'd rather pay my income tax up-front at the going rate instead of at some mystery future rate, and keep my savings and investments as unencumbered as possible.

The advantage of delaying tax payment is you have a larger upfront basis. With compound growth the initial amounts of invested capital carry _much_ more weight than later invested capital.

Just an alternative aspect to keep in mind.

If the tax rate you pay stays the same, it doesn't matter whether you pay the tax upfront or on the backend, you'll end up with the same amount.

If you had $18000 dollars and had the option of investing it all and paying tax later or paying tax now and investing the rest, you'll end up with the same amount.

If you have $24000 to invest, your two options are:

1. Invest $18000 in a 401k, pay tax on it later. Pay tax on $6000 now, invest the rest and pay tax on the gains later too.

2. Pay $6000 in tax now, invest $18000 in a Roth account, pay no tax on it later.

The second one is better because it's essentially letting you put more of your earnings into the tax-advantaged account.

Good point. So the assumption to defer tax must be that your tax rate will go down because your withdrawal tax bracket will be smaller than your current income bracket?

"The past is the key to the future". If you have 20-40 years of saving ahead of, look at what happened in consumer tax law the past 20-40 years. The first public deferred income savings just began in 1980 only 36 years ago. 401Ks became common in the 1990s about 25 years ago. Roths only this century. Capital gains taxes were lower than income taxes 1977-86 and 1994 to now. The tax free home gains deduction started in the late 90s.

The point is that retirement tax vehicles changed a lot in recent decades making it quite likely they always will in the future. Take advantage what you can now.

But weren't all of these vehicles put in place by the baby boomer generation? And said generation will be retiring more and more in the future and also living longer. This would seem to mean that those people will be moving their retirement money from stocks to bonds or withdrawing it completely. Would this not require an equal amount of investors to take their place? Additionally, if this generation of baby boomers lives longer and runs out of money, is it naive to think that some kind new laws would be required to support them in old age?

Boomers were never fully in the self-savings pipeline since these savings accounts were only available mid way through their careers. Your point is more valid for GenX which is the first group fully expected to save for themselves.

In 401k plans, employee money is employee money. They can make rules so that you can raid your own retirement, but not your employer.

They've the power to add taxes to 401(k)/IRA withdrawals in the future. I think it's unlikely - it'd be political death to whoever proposed it - but it's theoretically within their abilities.

They could realistically change the tax structure or even the retirement age(s) at which you could withdraw the funds. But if there were another mega-stressor to the financial system in the future, it seems that this pool of trillions of dollars would be ripe for the picking. Let's face it, lobbyists get what they want. Not the people. So if the bank's risky investments cause a panic and the only thing preventing an economic meltdown is the re-purposing of 401k funds....well...

If we get to the point of nationalizing private bank account balances, we've all got bigger issues than retirement.

I highly doubt it would be that direct. A realistic way to do this would be to change the tax structure based on age. Meaning, the only way to extract the money without incurring severe penalty would be to do so after some advanced age. Then put in place a rule that any funds left after death become part of a new social security style safety net. Likely for the ever-increasing number of baby boomers who are retiring and living longer than ever.

Retirement-age folks vote, in droves.

You could pass it, but I suspect all of Congress would be out of a job the next election.

Yeah, that's my point. You're talking about a retirement plan that impacts retired people who vote in droves. For the considerable future, those retirement age people will be baby boomers. They also happen to run the government. So why would it be unreasonable to expect them to pass laws that are favorable to them during their retirement as opposed to our retirement in 20/30/40 years.

https://fivethirtyeight.com/features/what-baby-boomers-retir...

401k plans typically consist of employee and employer matching contributions. But in any case, the things that stops you from fully accessing this money of your own free will are laws. Laws can be changed. I'm just wondering if today we're being as naive about 401k realities as people were about social security and pensions a generation, or two, ago.

Employer money is going to be a smaller amount of your 401k, if offered, and not always guaranteed, as sometimes subject to vesting so you wont' necessarily get it, but even so that's a stark contrast to pensions and social security, where all of your money is coming from someone else in the future.

I don't really see it as a stark contrast. Pensions and social security may be accounts where money is coming from someone else in the future. But a 401k is only semantically different. You do not own your 401k account in a real sense. That money is locked and kept away from you. You can only withdraw that money according to the rules in place at the time of the withdrawal. If you wanted to take that money out now, you would be paying the penalties in place that exist today. In 20+ years from now, when you intend to withdraw, you will be doing so with the laws in place at that time. And what those laws will be are unknown at the time. The same as current conditions were unknown to partakers in pension funds and social security a generation, or two, ago.

Tax consequences related to withdrawing your own money is very much a stark contrast to, whoops this money we promised you doesn't exist.

One of my biggest problems is that what you say is true in the way you mean it but it isn't really true. The way an employer gets at it is passing along all plan costs to the employees who then have their accounts debited every quarter for those costs. I think making employees pay for the benefit really lessens its effectiveness as a benefit (particularly if the plan has no matching).

Another way this is a problem is that the fees are typically debited from the employees based on their balance in an account. So if a 20 person company has five employees with very large balances and fifteen employees with very small balances then the five employees with the larger balances are subsidizing the other fifteen. You end up penalizing the people who have been the most dedicated to saving for retirement.

It seems like Guideline and OctaveWealth (mentioned in the comments) combat this by charging a recordkeeper-style per-participant fee rather than the percentage of assets that are typically charged by advisors and custodians.

Actually guideline is charging the participant fee as 3bps, which is a percentage of assets (but this is spectacularly low). They are charging the employer directly the per participant fee.

Whoops, I didn't notice, that 3bps is for the custodian

Correct, that's out direct custodian costs. We work hard every day to lower these costs. Custodial services do have value and are worth paying for.

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