The Accidental Founder of the 401(k) Plan

I always start my investing unit by impressing upon students that most, if not all, will be their own pension managers through a 401(k) plan and/or IRA.  The quality of their life post-retirement will be based upon the investment decisions they make in their working life.

I came upon this Marketplace article featuring the founder of the 401(k) plan with data on the asset balances in these plans as well as the historical context for how they have quickly become the largest source for retirement savings.  I liked the way the writer described the employee match as a “bribe” that makes it hard for employees to not invest (see the Case Study on Boeing’s 401(k) plan demonstrating the millions that go uncollected due to employees not taking advantage of the company match).

Highlights of the article:

  • The birth of the 401(k) happened accidentally with the company match being the key to its success:

“401(k) was an unassuming tax break for companies letting workers put away cash on the side. Only the tax nerds noticed… until divine inspiration hit [Ted] Benna.  “Hmm. Well, how about adding a match, an additional incentive? Immediately, I jumped to, ‘Wow, this is a big deal!'”  His concoction was effectively a bribe for workers: they got extra money from the boss and a tax break, if they took some of their own paycheck and set it aside for retirement.”

  • How does the founder feel about the 401(k) today?  while it is often too complex given the number of investment options, he feels it has benefited the middle class:

“Hey, if I were starting over from scratch today with what we know, I’d blow up the existing structure and start over,” he says. “What I’m talking about isn’t 401 (k). I’m talking about the way investing is done…Benna says the 401(k) was never meant to take care of everyone. It was simply a financial product that took off. And it did help middle-income Americans, tens of millions of them.”

  • Data shows how 401(k) balances vary based on age with the overall conclusion that most will not have sufficient retirements savings to maintain their standard of living.