Many employees work for companies that provide a retirement plan. Private sector employees may have a 401(k). Public sector employees may have a 403(b). Employees who do not have such a plan may contribute to a SEP IRA. There are also regular IRAs, rollover IRAs and Roth IRAs, each of which have specific rules and tax implications.

Wait, there's more!

Employers pay a 401(k) management fee to a financial company, which provides a set of mutual funds to the employees as investment options. The problem is that only a few funds are available (10 - 12), many of them overlap (large cap growth and S&P 500) and there are rarely any funds available to hedge against inflation.

It has been my experience that the financial advisers, who get paid lots of money to come and talk to the employees about their 401(k), generally spout the usual mantra of "stocks are good long term investments" while showing a market chart from 1982 to prove their point, "bonds are less risky than stocks" while ignoring the bond market decimation of the 1970s and 1994, and are quick to say that inflation hedges such as precious metals and commodities are unsuitable for a 401(k) because they are too complicated for most people and there would be too many funds in the plan (ignoring the fact that four of the existing funds are redundant equity funds).

So, what does that leave us with:

a) An inequity between those who have employer based plans (usually with matching contributions from the employer) and those who do not.
b) Extra costs for the employer, who is paying a management fee, plus additional human resources salaries to coordinate the plan.
c) Plans that have restrictive fund selection and are tied to a single institution.
d) Employees who are kept ignorant of proper investing strategies due to the restricted fund selection and advisers who give misinformation.
e) An alphabet soup of different types of IRAs.

In other words - extra costs for employers to provide a benefit that is too restrictive, keeps employees ignorant about investing and is not available to all workers. It also leaves employees juggling multiple IRA and 401(k) accounts.

The solution: Implement the Canadian retirement plan system! (note: this is the retirement plan, not the health care plan)

How does it work? Every year a person can contribute up to 18% of his prior year's earned income to a tax deferred account. That contribution is then credited against the person's taxable income for the current year.

This account can be with a bank, trust company and/or stock broker. The money can be invested in CDs, stocks, bonds, mutual funds and/or exchange traded funds (ETFs). Precious metals and real estate are not possible investments, but there are ETF proxies for these sectors.

The advantages:

a) The retirement plan is tied to the person and not the employer, thereby increasing worker mobility (see future posting about severing health care from employers).
b) It is available to ALL workers, even the self-employed.
c) It reduces employer costs, so more employees can be hired and/or salaries raised.
d) There are virtually no restrictions on investment vehicles.
e) It forces people to become more active investors because more choices are available.
f) It forces financial companies to be more competative because they don't have captive employees that are forced to invest in a single company's funds.
g) It eliminates the financial company double charging - charging a fee to the employer and a fund management fee that employees are rarely aware of.
h) It eliminates the alphabet soup of IRAs and their associated tax headaches.

I know several people whose 401(k) accounts were decimated this past year because the management company refused to offer the US Treasury and precious metals funds that would have helped hedge against the market downturn. Also, the "money market" equivalent fund was invested in Fannie and Freddie paper and one of the three companies that insured the 1.00 NAV went broke, so that supposedly "safe" fund was close to collapsing.

There is no good reason why we should be stuck with the current system. In this case, change is good!