[jogjayr]

Tangential question: why are 401ks employer-managed at all? Why can't they work like IRAs? That is, I create a Vanguard account, put money in it, take a deduction at the end of the year? If there's an employer match, give your company the account number to do a direct deposit.

Or better yet, combine IRAs and 401ks and just let everyone deduct up to $20k (or something else that's appropriate) to put into a retirement account you can't access till you're 59.5?

[wj]

A short answer is that they are replacing employer pension plans so that is how the tax code was constructed.

What you first propose would create a lot more administrative overhead for the employer and payroll company. However I could see that as a genuine business opportunity in the future, or at least a feature for a company list Gusto to implement.

[jogjayr]

Thanks for the historical context. I guess it kind of made sense to structure it that way at the time.

> What you first propose would create a lot more administrative overhead for the employer and payroll company.

Could you please explain how? I understand it will involve changes to existing processes, calculating withholding etc. But if the company is saved the trouble of finding a plan, administering it (or paying someone to) I would have thought it would be less work overall?

[wj]

Right now your employer makes a deduction from each paycheck and then one ACH payment (across all employees) to the custodian which the recordkeeper then invests at the participant's direction.

You way involves the employer making a deduction from each paycheck and then making an ACH payment for each employee to the institution of the employee's choosing. For a large company that is thousands of additional transfers. The way a company like Gusto could maybe do this is to store an employee's IRA account information like they do their bank information for direct deposit.

Also, FYI, when buying mutual funds through your 401(k) you aren't charged any fees for trading. Through my IRAs at least I get charged a commission for every purchase. With payroll deductions those would add up.

[jogjayr]

> You way involves the employer making a deduction from each paycheck and then making an ACH payment for each employee to the institution of the employee's choosing.

The other replyer already addressed the fact that companies already do this with paychecks.

With what I'm proposing, the only reason a company would even need to deal with an employee's 401K information is if they do contribution matching (which many companies don't). It's up to the individual to make the contributions from their paycheck and claim a deduction on their tax return at the end of the year.

> when buying mutual funds through your 401(k) you aren't charged any fees for trading.

They make up for that with high management fees.

> Through my IRAs at least I get charged a commission for every purchase

Not all brokerages do that. In any case, here it's a fee you're choosing to pay presumably because you get other things from that financial firm that you value. With a 401K your tax break is being held hostage in return for whatever fees your employer managed to negotiate on your behalf.

[somethingsimple]

> You way involves the employer making a deduction from each paycheck and then making an ACH payment for each employee to the institution of the employee's choosing

How is that different from the ACH transfer done into each employee's bank account when paying their salaries?

[wj]

Per my comment: "The way a company like Gusto could maybe do this is to store an employee's IRA account information like they do their bank information for direct deposit."

[dcosson]

Absolutely.

And, same for healthcare IMO. Assuming no single-payer system, the group negotiating companies have to do with plan providers is just such a waste. I was part of a 3-person startup last year, and nobody (even going through Zenefits) would even talk to us about a healthcare plan. We were apparently in some edge case that because we were all co-founders and had no employees we didn't qualify for most of the common plans or something. We ended up shutting down before our COBRA ran out so we never ended up figuring this out. But why does the system need to be so complex?

It seems like it could only help entrepreneurship and un/under-employment (less friction to try a new job) for as much of this stuff as possible to be decoupled from employers.