Yesterday's LA Times included an article about a new type of retirement plan that some businesses are lobbying for. The "automatic IRA" would allow employees to have money deducted from their paychecks to fund self-sponsored IRAs if their companies didn't have their own retirement plans.

While part of me hopes this effort succeeds, the other part of me thinks that the proliferation of different retirement options is the problem, not the solution.

When starting my business, I had a plethora of choices for retirement plans that I might set up for myself. (At present time I'm the only employee.) I could go for a Profit Sharing Plan, or a SEP IRA. The two are essentially the same, except that the profit sharing plan allows loans and requires more paperwork both allow the employer (my company) to contribute up to 25% of the year's total compensation, up to a maximum contribution of $42,500. I could set up an independent 401K, which allows the same employer contribution while also allowing the participant to take a salary deduction consistent with the limits on other 401Ks. Again, the $42,500 limit on total contributions would apply.

Then of course there's the traditional 401K, the CRA, the Simple IRA, the QRP and the Personal Defined Benefit.

For individuals there are all the standard IRAs and Roth variants, though all of these have much lower limts than company-sponsored or self-employed plans, meaning that W-2 employees of companies with no formal retirement plans are pretty much screwed in terms of tax-advantaged savings.

Each of these is designed to cover one situation or another, some to cover multiple situations, and many of them cover the same situation with slightly different contribution sources. Many of them don't work or work poorly. Has anybody not worked for an employer whose 401K offered terrible, high cost fund choices and no other options? In a previous life, I was subject to a 401K that was run by one of the company owner's buddies. The owner cared more about fees for his buddy than about a useful plan for his employees. He had his own "executive retirement plan."

It's crazy.

Here's my proposal, as a small business owner:

Don't add new retirement accounts to fill in for missing segments. Wipe the slate clean.

Two types of retirement accounts should exist: A traditional retirement account and a Roth retirement account. The only difference would be in how the contributions and distributions would be treated for tax purposes.

Every employer would be required to allow you to direct-deposit contributions to the plan of your choice, on either a tradition (pre tax) or Roth (post tax) basis. The employer would be allowed to make their own contributions as well, with a standard limit set for the maximum combined contribution.

Any companies that believed they could provide a real benefit to their employees by having an in-house plan would still be able to do so. Others might choose to open a default account for any employees who didn't make an alternate selection.

It would be a win-win. Employees with no company-sponsored plan would still be able to have the option of full retirement savings. Employees with a lousy plan would be able to opt out. Self-employed and small business owners would have similar options to everybody else without a bewlidering set of choices. And employers whose core competency doesn't include running retirement plans would be able to focus their energies on the things they do well.

Oh yeah, and while we're at it, lets get rid of any favorable tax treatment for any retirement plan that is available only to select employees.

-btc