The original proponents of the 401 (k) plan, which has become the dominant source of retirement provision for most Americans, regret the revolution they inadvertently started.
“[Many early backers of the 401(k)] say it was not intended as a primary retirement tool and admit that they used projections that were too optimistic to sell the plan in its early days, “reports the Wall Street Journal.” Others say the spread of 401 (k) plans uncovered has workers, big falls in the stock markets and high fees from Wall Street money managers. “
Even the “father of the 401 (k),” Ted Benna, tells The Journal with some regret that he “opened the door to Wall Street to make more money than it already made”.
Other experts agree: The Economic Policy Institute recently blogged 401 (k) s as “a poor substitute” for the defined benefit plans that many workers have relied on primarily that provide fixed payout and retirement plans these are now becoming increasingly rare. Nowadays “just 13% of all private sector workers have a traditional pension, compared with 38% in 1979, “reports The Journal.
And this despite the fact that 401 (k) s are far less secure: “ULike defined benefit annuities that provide lifelong payouts, 401 (k) accounts rise and fall with the financial markets. ”
The accidental retirement revolution began in 1978 when Congress decided to change the tax law with the Revenue Act.
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1978: Congress passed the Revenue Act of 1978, including a provision – Section 401 (k) – that gave employees a tax-free opportunity to defer compensation from bonuses or stock options. The law came into force on January 1st, 1980.
Ted Benna, a benefits advisor at Johnson Companies, saw the law as an opportunity for employers to set up a tax-privileged savings account for their employees.
“I knew it was going to be big, but I certainly didn’t expect this to be the most important way to raise money for retirement over 30 years later,” Benna now tells Workforce.
1981: The IRS issued rules allowing employees to contribute to their 401 (k) plans through payroll deductions, which fueled the widespread adoption of 401 (k) plans in the early 1980s.
1983: Almost half of all large companies offered or considered offering a 401 (k) plan. Businesses liked the option because it was cheaper and more predictable to finance than annuities. Employees were drawn to a new savings vehicle that they were told could put them in a better position for retirement.
“Two bull market runs in the 1980s and 1990s drove up 401 (k) accounts,” reports The Journal. Then, “two recessions in the 2000s undone those gains and made some early 401 (k) champions food for thought.”
1990: 401 (k) plans held more than $ 384 billion in assets with 19 million active participants.
1996: Assets in 401 (k) plans exceeded $ 1 trillion with more than 30 million active participants.
2001: The Law Reconciling Economic Growth and Tax Relief resulted in several changes to 401 (k). In general, the law has increased the amount that individuals and businesses can deposit into the accounts. In addition, it enabled participants over 50 to make “catch-up contributions”. In 2017, the contribution limit is USD 18,000 and the maximum catch-up contribution is USD 6,000.
2006: The Pension Insurance Act has made it easier for companies to automatically enroll their employees in 401 (k) plans. Some companies have even automatically increased their employees’ contributions by 1% per year to encourage saving.
Today: 401 (k) plans contain more than $ 4.8 trillion in assets. And pensions are becoming increasingly rare in the private sector.
“The big lie is that the 401 (k) could replace the old pension system,” Gerald Facciani, former director of the American Society of Pension Actuaries, told The Journal. “It was oversold.”
While some early proponents of the 401 (k) plan have concerns, it cannot be denied that “401 (k) s have seen tremendous growth and workers are investing more money today than ever before,” said Sarah Holden, senior director for Retirement and investor research at ICI who spoke to The Journal. “[These plans] have established themselves as a successful part of the American pension system. “
Anyway, they’re not going anywhere.
Read how to prepare your 401 (k) plan for 2017.