We should get employers out of the [fill in the blank] business

We should get employers out of the [fill in the blank] business July 17, 2014

Those of us who have not gone into an apocalyptic panic at the Hobby Lobby court decision have observed that the obvious solution to the issue is to get employers out of the business of providing healthcare to their employees.  After all, in any reasonable world, it sounds more than a little preposterous to say, “employers must provide contraception to their female employees and the wives of their male employees.”

And this morning I was listening to a training session on the latest trends in Defined Contribution plan consulting.  Much as we actuarial consultants try to convince our clients that if they don’t step up, their employees are going to be unwilling to retire “on time,” because they’ve frozen/terminated/never had in the first place DB plans and participants don’t have enough saved in their 401(k) accounts, the clients’ primary concern is with compliance and with their fiduciary liability.  And to the extent that they’re looking to increase their employees’ nest eggs, it’s not by increasing the employer contribution but by getting employees to contribute more, or by seeking out the “free money” of reduced provider fees or getting their employees to invest in ways that produce greater returns.

Why don’t employers get out of the healthcare business, and just give their employees a fixed sum of money with which to buy insurance?  Because of the employer mandate, to start with, but also because employer-purchased health insurance is tax-deductible, but not individual insurance purchases, so employees would take a financial hit if employers did this.

If that weren’t the case — if Obama executive-ordered the mandate out of existence and decreed that individual premiums were deductible (he could do it if he wanted to, based on his prior justifications:  he’d just announce that the IRS would not prosecute anyone who claimed that as a deductible medical expense, and ignored the 10% threshold, when they calculated their taxes), would employers still provide healthcare?

And once we move past that question, here’s the follow-up:  why don’t employers get out of the 401(k) business, and just provide bonuses that are paid directly to a payroll-deduction IRA?

To begin with, because Congress has designed the system with significant limits to individual retirement savings.  Here’s one of many descriptions of the IRA limits online:  a limit of $5,500 in annual contributions, which is only tax-deductible if you don’t have a 401(k) plan available at work, or if your income is less than $60,000 (for singles, partially deductible up to $70,000; for couples the figures are $96,000 and $116,000).

A 401(k), on the other hand, allows up to $17,500 in employee contributions, and up to $52,000 in employer contributions, as found on the IRS site.  (These maximums may be reduced for high-income individuals impacted by what’s called “non-discrimination testing,” which is fairly technical.)

Why aren’t these limits the same?  Wouldn’t that be an easy solution to the difficulties people experience in saving for retirement when their employers don’t offer a 401(k) or offer one with unsatisfactory investment choices or too-high fees?  Yes, to be sure, for a low earner, the IRA limits might not make much difference — after all, if your income is as high as $55,000, the limit is still 10% of your income, which is a tolerable savings rate.  But if IRA savings were an option for upper-earners as well, then it would become more likely for employers to move to a payroll-deduction process of contributing to employee-selected IRAs.

Would this be a suitable direction for retirement savings to move towards?  Do employees need their employers to nag them, not just to invest in the first place (which could happen via direct deposit, if nothing else — splitting your paycheck into two pieces, with the lion’s share to your regular bank account and a smaller portion to an IRA), but to invest properly?  And has Congress kept these different limits for the very reason of effectively mandating that every responsible employer offers a 401(k)?

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