The accidental rise of the 401(k)

Did you know that the 401(k) was never intended to be the primary vehicle to cover people’s retirement? In a cascade of unintended consequences, following no serious public policy debate on the issue, many Baby Boomers now find themselves at a destination in which they were never intended to arrive.

Take a look at this Marketplace article published in June 13, 2013. It features an interview by reporter Scott Tong with Ted Benna, widely considered to be the father of the 401(k):

Father of modern 401(k) says it fails many Americans

A few quotes and observations from the article,

  • Benna says, “…the 401(k) was never intended to cover everyone’s retirement.” Further, he observes that the current system is too complicated and incurs sizeable and unseen fees.
  • Per Benna, “Hey, if I were starting over from scratch today with what we know, I’d blow up the existing structure and start over. What I’m talking about isn’t 401(k). I’m talking about the way investing is done.”
  • The rise of 401(k) plans was accidental. In the past workers had company pensions and Benna was in the business of helping run such plans. In the 1970s, business owners were looking for ways to gain bigger tax breaks.
  • In 1978, Congress passed a hardly noticed add-on to the tax code in Section 401. It was a paragraph denoted with the letter “k.” It represented a tax break that allowed workers to put away cash on the side.
  • Added to this concept was the idea to allow a “match” or incentive to encourage workers to save more. Benna suspected the idea would take off. And it did.
  • In the early 1980s, with big companies leading the way, the new plans were offered in droves. Before long, even companies that never before had any type of retirement plan, were offering the new option.
  • Companies also started ditching what were perceived to be costlier traditional pensions plans – i.e. plans that offer a defined benefit at retirement, say 70% of a worker’s final salary payable for life.
  • Thus, the door was opened, on a completely serendipitous and unintended basis, to the DIY retirement era. Responsibility and risk for making plans a success was transferred from employers onto individual employees.
  • Another unintended consequence was that plans caused increased levels of stock ownership. Benna observes, “Unfortunately, the worst thing that happened with this wretched market is too many had the highest stock ownership that they ever had at the wrong time.”
  • During the mid-1990s bull market, participation in 401(k) type plans rose to 30 million Americans. In spite of this rise in popularity, roughly half of workers in America today still have no retirement plan.
  • Studies suggest that the typical middle class household as only about ten percent of the funds needed for retirement.
  • Benna never meant for this concept to become a do-it-yourself system that would replace traditional pension plans. But now, “This is kinda the whole enchilada…It’s not good, but it’s reality.”
  • The idea was “…simply a financial product that took off.”

So what are your thoughts? Should it bother anyone that such a major piece of piece of public policy happened essentially by accident? I suppose many good things got started that way. Is this one of them?  What are things people can do to make up for the shortfalls they are finding with their 401k plans? What have you tried?

Let me know your thoughts by email or in the comments below.