Why is there such disparity of max contribution limits between 401K accounts and regular IRA accounts?

Question

In 2011, regular IRA accounts allowed only $5,000 maximum contribution, while 401K accounts allowed up to $16,500. Why is there such a disparity? Why do tax advantages favor employees of large employers that can afford 401K programs?

Answer 1

The 401k was not written with the specific intent of enabling retirement savings.

Why do tax advantages favor employees of large employers...

It seems that large businesses have been more effective at influencing legislators despite that there are more people are employed by small than large businesses.

Answer 2

IRAs were invented to help individuals save for retirement.

401(k)s were invented to help corporations provide more compensation to highly valued employees.

Answer 3

The investments offered in 401K are usually limited to a selection of mutual funds offered by a 401K provider. The 401K providers and the mutual funds charge fees. The mutual fund industry has a lobbying group that will push for increased 401K contributions to direct money into their mutual funds to collect fees. The top 401 K provider in 2005 was fidelity. It managed $337 billion in 401Ks of which $334 billion was directed into mutual funds.

Although I would have to use some of the same providers to open an IRA, I would not have to invest in the providers' mutual funds when I open an IRA. I can buy a stock and hold onto it for 10, 20, 50 years inside of my IRA. Thus, the only fee the investment company would collect from me would be from when I purchased the stock and when I sold the stock. Not nearly as profitable as mutual fund fees.