Advancing the Opportunity Agenda: Make 401(k)s More Portable

Robert L. Johnson on CNBC

by James A. Bacon

Robert L. Johnson, founder of the Black Entertainment Network and America’s first black billionaire, touted a proposal on CNBC this morning to help African-Americans — and, for that matter, all Americans — build wealth through their 401(k) plans. His proposal would make it easier for Americans to carry their employer-based retirement plans from one employer to another.

Sixty-three percent of African-Americans cash out their 401(k) plans when they move from job to job, said Johnson. With “auto-portability,” workers would not have to take any action for their 401(ks) to follow them. Often, owners of small accounts are given the option of cashing out. When they do, they pay various taxes and withdrawal penalties. People still would have the freedom to cash out if they really needed the money, but the administrative change would nudge them into keeping their funds intact and, thereby, boosting their savings.

African-Americans are more likely than other Americans to have small accounts that would be ported from one employer to the next. Over time, Johnson claims, his proposal would put approximately $191 billion dollars into the retirement savings of black Americans (and many billion into the savings of other Americans).

Here’s what I like about this proposal — it’s win-win. Auto-portability is a tool for helping African-Americans increase their net worth, but it’s not a carve-out or set-aside that creates a privileged racial status. Auto-portability would help all Americans with small 401(k) plans but African-Americans would benefit the most.

There has been a lot of talk about the inequality of wealth between the races, and it’s true that African-Americans have accumulated far less than other racial/ethnic groups. There are many possible explanations, but one is that African-Americans save less. Johnson’s proposal addresses that problem directly. Boosting African-Americans’ savings rate is not a remedy you often hear from social justice militants.

While the victimhood-and-grievance agenda of social justice militants would enact government-funded programs that would keep African-Americans as wards of the state, an Opportunity agenda would remove barriers to wealth building and empower the poor, particularly African-Americans, to take charge of their own destinies.

An Opportunity agenda would give minorities the means to escape failing public school monopolies by attending charter schools and private schools.

An Opportunity agenda would convert state assistance to public higher education, which academic and administrative elites use to maintain a bloated and inefficient status quo, into vouchers that put consumer power in the hands of students.

An Opportunity agenda would build on the success of Virginia’s Department of Corrections in teaching skills and reintegrated felons into society as a way to drive down the rate of recidivism.

An Opportunity agenda would loosen zoning restrictions that throttle the supply of new houses, the root cause of housing unaffordability, thus making it easier for African-Americans to accumulate wealth through home ownership.

An Opportunity agenda would drive productivity and innovation in the health care sector to drive down costs, improve outcomes, and make private health insurance more affordable for all.

And an Opportunity agenda would encourage African-Americans to spend less, save more, and accumulate capital.

An Opportunity agenda would be win-win for everyone. Many elements could be implemented here in Virginia if only our elected officials could get over the idea that more government programs are the answer to every social ill. Giving African-Americans the tools to improve their own lives, not keeping them dependent on the ministrations of political elites, is the surest way to achieve equality in Virginia and America.

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36 responses to “Advancing the Opportunity Agenda: Make 401(k)s More Portable

  1. They save less because they make less….

    telling a person who can barely pay for their living expenses to save more is pablum.

    The Obama administration enacted the type or portable IRA that is advocated here and it was done away with by this administration.

    And if we are going to have portable IRAs – and we should – and we should have a long time ago – let’s also have portable health insurance if we really want that “Opportunity Agenda”.

    You let people have their own portable IRA and health insurance and watch what happens… it will totally change our entitlement culture..and it will incentivize getting a good or more education.

    Good Post! Much, Much better than those culture war ones!

    thank you!

    • Okay, Larry, now just what previous 401K provision was “done away with by this administration?” Nothing comes to mind but please, enlighten me. I’ve never had a problem rolling these accounts over, but it certainly could be simpler.

      An “opportunity agenda” seems seems of little interest to either party. Just not their focus, sadly. Some expect the government to meet their needs, and others vote to prevent that, at least for anyone other than them…..

      And I can think of two jobs where I would butt my head against the wall explaining to our employees the advantages of a 401k and of capturing the employer match, only to have them decline. The state employees in particular were convinced that VRS would satisfy all their needs, with no point in supplementing it.

      • https://en.wikipedia.org/wiki/MyRA

        I’ve seen the problems with IRAs in doing taxes for folks.

        Invariably, they are not financially literate in general but especially don’t understand IRAs – they have the impression they cannot be transferred AND that they CAN “cash” them when they change jobs.

        The problem is they can “cash” them now and not understand the consequences until later at tax time.

        This is one of those things when Dad never had an IRA, never understood them and did not advise their kids who then grew up just as ignorant.

  2. The problem is “the employee decision” and inadequate advice. Technically, you can generally leave your 401(k) with your former employer as long as you wish, roll it into your new employer’s plan, or into a Traditional or Roth IRA, depending on the type of 401(k).

    Of course, you wouldn’t leave your wife’s picture on your desk, so why leave your 401(k) money? Pretty much leaves two options; roll it to yor new company plan, or your IRA.

    The big differences are with a 401(k), you can borrow from it, with the IRA having more flexibility in investing.

    Different subject, but Reagan inadvertently established an income trajectory when in 1986 they established the cap. That gives us two income trajectories for basic retirement planning; the cap income, and minimum wage income. Assuming two workers, one at the cap, one at minimum wage, and an investment that returned 4% yoy for both, with today’s max and min Social Security then an employee could retire at 100% after 40 years had they just invested $500 per year for every $15,000 in income.

    I did the calculations 6 or 7 years ago, easy to replicate, and update, but it is backward looking, so iffy for planning out 40 years instead. Nevertheless, it is certainly cheap enough that employer-paid contributions for low (2x poverty) employees could keep them off cat food and living independently.

    • I was six or seven when my grandfather the banker taught me the rule of 72 and my love of compound interest was born….

      His stock in that bank also passed to his children, and then most of his grandchildren. No question, capitalism is also learned behavior.

      • and grandfathers of other folks lower in the economic food chain knew nothing about any of it much less passed it on to their grandkids.

        This is not a “fault” thing… but it does illustrate – how many generations of a family it takes to achieve a higher level of education and understanding…

        Social Security, unlike an IRA does not allow one to “cash” it.

        Perhaps that’s what is needed for IRAs.

        • “Perhaps… ”

          That was one thing about the Bush plan I liked. Of course, as badly as it was thought out — equivalent to the “replace” in “repeal and replace” — it would have been a money grab for Wall Street and a crushing loss for the poor. For a person earning at the cap, who lives to age 90, SocSec is a 2% return yoy investment. But for someone at and below 2x poverty, SocSec is a 10+% return yoy investment. No way in Hell the average American can get that return in a self-directed account.

          • SS is an insurance annuity with survivor benefits as well as inflation adjustment.

            You get the same amount no matter how long you live.

            If you tried to buy that kind of annuity from the private sector, good luck on a competitive price – and good luck on trusting the entity without government protections.

          • Nancy_Naive

            Oh absolutely! Moreover, name one investment company with the “full faith and credit” clause. Or whatever.

      • “No question, capitalism is also learned behavior.”

        Yes, but like capitalism itself, the knowledge of how to benefit from capitalism is learnable by those with an average IQ or above — based on the misconceptions found on conservative blogs, and some of the dumb stuff coming out of the GOP.

  3. James Wyatt Whitehead V

    Most working class people I know spend as soon as they can get their hands on the cash. The Old Dominion was pay as you go. The New Dominion is spend now pay never and save never. Mr. Haner is right about the disciplined habits of saving. It is probably best taught by a family member who is good at it. I was very fortunate to be raised by Depression Era grandparents. No question about it they made a huge impact on me. The hardest part was learning how to deny yourself the things you really want but do not need. Schools are trying to educate youths on financial literacy. Required for graduation now. Based on what I have observed in the high schools that curriculum is more like calisthenic than a acquired habit of mind.

  4. There is no question that this kind of “education” comes from the generational family better than public (or even private) education.

    It is my belief that this is one reason why Asians do so well – they have strong generational families AND they counsel their young on education and financials.

    Those who grew up with the mentality that they could “work with their hands” – did okay until the world started to change – and know “education” is financial… the better educated you are – no matter how – the better chance you have at being able to recognize and capitalize on opportunity.

    Those who grew up poor – with poor parents – are truly disadvantaged.

    • Here’s another scenario for you:

      Two parents. One has a steady job, works, managed to buy a house and pay the bills.

      The other worked on and off, never had a steady job, never really liked working, always wanted a “good provider”…and has TERRIBLE money management skills.

      The one who doesn’t like working files for divorce, gets “half of everything”.

      25 years on, the one who got “half of everything” is relying on their kids to support them because they made some very bad financial decisions that resulted in “half of everything” becoming “all of nothing”.

      This is hardly an isolated case. I know of several cases where someone has gotten a decent sum of money via an inheritance or otherwise and completely mismanaged it until they had nothing. Likewise if they inherit a house–you might think that you’d pay the taxes and keep fire insurance on it, but some people have other priorities.

      I’m gonna go out on a limb here and suggest that if you don’t have the skills to bring in an income to even support yourself, you also don’t have the skills to manage a windfall.

      While I’m on that subject, maybe some consideration could be given to paying out SSDI and other entitlements twice a month instead of once a month in order to prevent the recipient from using their supreme money management skills to figure out how to blow the entire sum in the first week of the month.

      • re: ” I’m gonna go out on a limb here and suggest that if you don’t have the skills to bring in an income to even support yourself, you also don’t have the skills to manage a windfall.”

        all kinds of variations of that…

        • I think a lot of it stems from innumeracy.

          • I actually agree but how many things did you learn about AFTER you encountered them? Owners manuals, instructions, terms of service, etc…

            we don’t stop learning after formal education.

          • No, we don’t stop learning after formal education.

            Or at least we shouldn’t.

            But many won’t read those manuals, those terms of service, etc. They won’t ask questions or make some attempt to understand.

            It’s like someone I know who had a problem with a leak under their sink. I told them they could have turned the water off with the shut off, rather than waiting until I showed up to deal with it.

            “But you never showed me how!”

            …and I have oceanfront property in Arizona to sell you if you think, had I attempted to show that person how to turn the water off under their sink BEFORE THEY NEEDED TO KNOW HOW, that they would have cared or paid any attention.

            Next time I think I’ll tell them to call a plumber.

      • That is why you never get married! Instead, just find some girl you can’t stand and buy her a house.

  5. I thought they were portable. “Rolling over” is what I assume I was thinking about and it is not a simple thing to do. To make portability simpler would take federal I legislation, I assume. Good luck on getting Congress to do anything right now other than confirm judges.

    • It’s not THAT hard, but there are a myriad of rules. Making the rules simpler and consistent between the various types of plans would help.

      The key phrase to use, and keep repeating, is “Trustee to Trustee transfer”, then the IRS is very happy.

  6. The thing is – portable is really an equity issue for folks who work at multiple jobs and need to be able to set aside to one account.

    IRAs are set up for folks right now primarily who have one or two job careers – not service sector employment.

    It’s just like our health insurance. It’s set up primarily for people who work for a career at one employer or who can switch to another employer with health insurance. It’s not set up for people who work at many different jobs – at he same time or over time.

    If you want people to “learn” to save – you need to have a way for them in the work that they do… and we’re less and less a one career economy and if we somehow find a way to let people buy insurance no matter their employer – you’re going to see a lot more folks pursuing “opportunity”.

    It’s not that we’re being held back – as much as it is – that not everyone has access to the same opportunity and that ought to be what we should pursue.

    • Larry you jump from 401k to IRA – they are two separate things and work very differently. With an IRA one with multiple jobs can put money aside in one account. 401k on the other hand is administered through an employer. IRAs also have some very different rules where you can withdraw money penalty-free for various purposes.
      I also take offense to how it’s always … people without parents don’t know… that’s BS in today’s world where for 95% of Americans you can get on the interent for free at any libranry and Google anything or pick up a damn phone. My parents abandoned me, and they never saved a penny or discussed money. I Googled investments and with the slightest bit of effort learned about how to invest for my and my daughter’s future.

      • they’re similar and they also point out the difference between longer term career jobs and the types of jobs that lower income/entry level end up doing but here is a decent compare:

        ” When employers want to give employees a tax-advantaged way to save for retirement, they may offer participation in a 401(k) plan. They may also offer employees a SEP (Simplified Employee Pension) IRA or, if the company has 100 or fewer employees, a SIMPLE (Savings Incentive Match Plan for Employees) IRA.1

        Individuals can open a Roth or traditional IRA separately from an employer, but only have access to a 401(k), SEP IRA, or SIMPLE IRA when offered by an employer.2 3 For the self-employed, “employer” includes an owner/employee.4 As their names imply, SEP and SIMPLE IRAs were designed to make it easy for employers to set up a retirement plan for employees. They have fewer administrative burdens than 401(k) plans.5″

        I would submit to you that not many actually know the difference until or unless they need or want to do something – then they find out.

        Self-directed IRAs would seem to be the kind of IRA that folks who work several jobs or are self-employed might need:

        ” The Self-Directed IRA LLC “Checkbook Control Solution”

        The Self-Directed IRA LLC with “checkbook control” is a tax court and IRS approved retirement plan. With the Self-Directed LLC, you must establish a Limited Liability Company (LLC). The IRA will own the LLC and the IRA holder manages it. This setup gives the IRA holder “checkbook control” over his or her retirement funds. Begin to make any IRA investment as easily as writing a check or wiring funds from the Self-Directed IRA LLC bank account.”

        but it should not be this hard.

        401(k)s and IRAs – BOTH and allied are better suited to people who have career jobs at one employer… Once you are into multiple jobs, management of the IRA requires more knowledge and expertise than many have.

        It’s like your health insurance. Perhaps you have read it and know about the nooks and crannies. A lot of people do not – UNTIL they end up with an expensive procedure or similar. THEN they find out. It’s NOT that they are not smart enough to read and know, it’s that they never learned… and that’s true of a range of income levels until you get to high income and the high income person can afford direct professional help – without them actually knowing the nooks and crannies.

  7. From the article and comments it seems like most think the government should take a full grow adult’s money and hide it from them. Sorry, I tend to believe in freedom. If some aren’t wise enough to squirrel away a nut then it sucks to be them.
    If we’re going to walk down this road why don’t we just take 20% off the top and stop giving tax breaks for 401(k), IRA, and other retirement mechanisms? Make everyone an American bond owner for their retirement. Nothing I want more than AOC or Orangeman deciding my financial future… but then again maybe people will care to vote…. damn I just convinced myself….

  8. re: ” Nothing I want more than AOC or Orangeman deciding my financial future… but then again maybe people will care to vote…. damn I just convinced myself….”

    Uncle Sam already gives you “benefits’ for saving… the problem is he gives benefits differently depending on how you earn your money.

    That’s not the govt deciding for you- that’s the govt picking winners and losers.

    What would happen if folks could “cash” their social security, BTW?

    would that “work”?

  9. Way back when I decided no employer IRA for me… you have little control over it…
    I put my money, time and skills into purchasing, managing and caring for Single Family rentals…
    And it has and is paying off way better than an IRA. And when I say paying off I’m just talking about rental income, the assets, (houses) will be passed on to the next generation..

    • Make sure your properties are deeded with “Transfer on Death” deeds. They are fairly new in Virginia (5years?) and keep property out of probate. Also, it’s not hard to keep the beneficiary statements on bank accounts and IRAs etc up to date to keep that money out of probate too.

      In fact, there is little excuse for any estate to have to enter probate.

      About the only piece of property, that I can think of, that is likely to end up in probate is a documented yacht since federal documentation doesn’t have a transfer on death option.

      • Why wouldn’t you just have an LLC with ownership so that no transfer is necessary, just keep the “ownership” structure up to date with who you’re leaving it to. For that matter, particularly if you’re owning and managing many properties, it may make sense to have multiple LLCs to spread the liability, so that each one owns only a few properties.

  10. How would that differ from joint ownership?

  11. Unlike many states, Virginia taxes the bejesus out of cars and 401K/IRA withdrawals. Can you imagine? Michael Vick lived in a small house for couple years, and ended up in the hole $70,000 in back taxes owed ( it was car taxes he owed, of course). People from out-of-state would not understand how that is even possible. But I digress.

    How about giving retirees with IRA’s some discount from full tax rate. That would encourage more withdrawals, eg for IRA conversion to Roth, and might actually increase tax revenues.

    • That’s just the powers-that-be in Virginia sending you the subtle hint that if you are even thinking about withdrawing from your IRA or 401k, you should probably be making plans to move out.

  12. BothVirginia AND the localities tax the bejesus out of NEW cars. I KNOW the Feds tack on an extra 10-20% on withdrawals from investments..not sure about Virginia… differentiate between taxing an IRA withdrawal as income plus the additional penalty.

    I don’t know how the car tax works in other localities but in ours – they do very much tax the crap out of new vehicles and it and I assume it goes to the schools (along with other property and sales).

    New cars ARE , depending on one’s point of view, a good proxy for wealth. If you can afford a new car, you might be more “wealthy” than someone who can only afford an older one.

    In an exurban county – might think of it this way. This long-distance commuters who have good jobs in the urban areas and commutedout to the exurbs for a cheaper house – and expect their kids to get educated… perhaps their cars should be taxed to help pay for the roads and schools costs those commuters have externalized… 😉

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