The Man Behind the 401[k]
B E L L E F O N T E, Pa., Jan. 18, 2001 -- Ted Benna was thinking about giving upretirement planning to become a full-time Quaker minister when hestumbled across something new buried deep within the federal taxcode.
The change — a paragraph (k) added in 1978 to Section 401 of theInternal Revenue Code — was intended to clear up a tax issue over acorporate profit-sharing plan. But Benna saw a broader application:an avenue for converting after-tax savings plans into tax-deferredretirement accounts.
Thus was the humble beginnings of the 401(k), which over theyears has become a wildly popular savings program and a hugestorehouse of national wealth. Some 48 million American workers nowhave 401(k) plans worth more than $1.3 trillion.
"I knew it would be big," said Benna, who now does retirementconsulting from this central Pennsylvania town. "Of course, Istopped projecting in the billions — I never got to thetrillions."
Mover and Shaker in Retirement Account World
Benna remains a mover and shaker in the retirement-accountworld. He contributes regularly to publications, and heads the401(k) Association, which promotes the retirement plans and lobbiesCongress to oppose laws that would add more regulations.
He's also an open advocate of unrestricted employee choice indirecting their 401(k)s, which he sees as a win-win situation — workers make their own investment decisions, and employers arerelieved of legal exposure.
"It's your money," he said. "You should have the choice, thecontrol, and the employer shouldn't be liable."
The 401(k) idea, as popular as it is now, didn't catch on rightaway.
Benna's first proposals were a Philadelphia bank and a couple ofinsurance companies, but they fell flat. So he made a guinea pigout of The Johnson Cos., a suburban Philadelphia employee benefitscompany where he was a partner. He persuaded some of the company'sworkers to try his idea, and their first contributions were made inJanuary 1981.
A Revolution in Personal Finance
By adding a company match — not discussed in the tax code change— Benna thought he could encourage low-wage employees toparticipate. This was key, for under Section 401(k), the amounthigh wage earners could put into their accounts was pegged to howmuch the less well-paid workers contributed.
Benna's invention has revolutionized personal finance,transforming participants from simple benefit recipients to activemanagers of their retirement plans. For many employees, their401(k) is their largest asset.
"It has not only increased people's awareness of saving forretirement, I think it has changed their orientation," said LaurieFleischman, vice president of marketing at Diversified InvestmentAdvisers, a retirement consulting company based in Purchase, N.Y."The typical employee now sees them self more as a consumer of[financial] information."
Evolution of a Retirement Plan
Much of that awareness, Benna says, stems from the evolution ofthe 401(k) plan itself.
Employees contribute pre-tax dollars and most companies match atleast a portion of the employee's contribution. Investment earningsare tax-deferred until retirement and employees can take their401(k) with them when they change jobs. They can also borrow fromtheir accounts and repay the loan with interest, and funds may bewithdrawn to pay uninsured medical bills and certain other hardshipexpenses.
For employers, a 401(k) program can help attract and keepworkers, and can be a less costly alternative to a traditionalpension plan, particularly for small companies.
In early plans, contributions were managed by the employer.Employees eventually were given the option of directing theirinvestments into broadly defined categories, and now most canselect from a variety of specific funds.
But employers still choose the funds offered to employees andthe company that administrates the plan. That leaves employers opento lawsuits when they change plan administrators and open tocriticism about limited choices for workers.
"No one mutual fund family does everything the best," saidJohn Fletcher, who administered the first 401(k) plan for theJohnson Cos. and now is a consultant with Jamison, Pa.-based PlanAdvisory Services.
"They may be good value managers, they may be good bondmanagers. One fund may be better in international funds, another insmall caps. But I've never seen one fund family do everythinggreat. So why not have the ability as a participant to pick thebest of the best?"
Benna predicts that unrestricted choice is where the 401(k) isheaded. In the next 10 years, he expects employers to get out of401(k) administration altogether, giving employees complete choiceover how to invest their funds.