Father of the 401k
Ted Benna, Father Of The 401(k), On The State Of Retirement Savings Today
The way Americans think about their retirement has fundamentally shifted over the past four decades, and much of that revolution is due to a man you’ve probably never heard of: Ted Benna.
The so-called “Father of the 401(k)” didn’t exactly invent the 401(k), which is named after an eponymous section of the Revenue Act of 1978. Rather he pioneered a novel way to interpret the law that allowed employees to save pre-tax salary in a retirement account while also receiving a matching contribution from their employers.
“Neither one of those moves were included in legislation, which was only about a page and a half long,” Benna told Forbes Advisor’s Taylor Tepper. “There was nothing saying you couldn’t do it, and nothing saying you could.”
Benna thought up this scheme during a quiet day on behalf of a bank client, although they were ultimately not interested. So he turned around and implemented the new strategy in his company’s own retirement plan and the rest is history.
In the years following Benna’s aha moment, IRS and Treasury department essentially sanctioned Benna’s interpretation and the 401(k) took off.
Just 8% of Americans contributed to a defined contribution plan in 1980, compared to more than 43% in 2021. Roughly 60% of companies offer 401(k)-type plans today, and they hold more than $7 trillion in assets. The median amount in a retirement account (in 2019 dollars) per family has tripled since 1989.
Forbes Advisor recently sat down to chat with Benna, who recently published an updated version of “401(k)s & IRAs For Dummies,” a history of retirement savings in the pre-401(k) era as well as the plan’s struggles and opportunities today. We chatted about the state of retirement, how the seniors’ golden years have changed over time and what can be done to improve 401(k)s. The interview has been edited for clarity and length.
How do you feel about the 401(k) replacing the pension?
Well, that’s not quite right. Historically, no more than around 45% of private workers were covered by pensions. They were usually offered by big companies, like Bethlehem Steel, but not mom-and-pop stores.
When I met with a room full of senior executives about the 401(k), I was nicely told that employees didn’t need to save for retirement on their own. Bethlehem Steel would take care of them.
So how did people afford retirement?
It wasn’t much of an issue, there wasn’t a lot of planning around it. You’d have Social Security and whatever personal savings you managed to accumulate. Older people would end up living with their kids.
At my family Christmas gatherings, for instance, my mother wasn’t talking about retirement savings. That happened among my siblings and children, but not back in my parent’s time. Family connectivity isn’t what it was.
Also, you need to remember that when you go back to my parents’ era, it was retirement at age 65 or later, which made it perhaps a 15-year event. Now, you’ve got increased life expectancy along with government employees making retirement a mid-to-late 50s event for a lot of people.
What do you think is the 401(k)’s legacy?
Despite the 401(k)’s shortcomings, just imagine where we would be today without it. It will continue to be a huge benefit since it helps turn spenders into savers. The savings comes off the top, so a lot of people don’t miss their money when it’s going into their 401(k).
How would you fix the 401(k)?
I’ve been an advocate for a number of years now to require companies to use plan auto-enrollment, either one of their own or one administered by the state, like they have in Oregon and California. I also think the default should be auto-escalation, so people save more over time.
Over the last three to four years I’ve been helping small employers find more effective ways to use IRAs rather than 401(k)s, which may not be right for them.
Opposition from the small business community—I’ve owned and run small businesses—is overblown: Doing a payroll deduction is not a big burden.
What about small businesses that are interested in offering a retirement savings plan but are worried about the administrative headache of a 401(k)?
For many small businesses, a 401(k) isn’t the right answer. A lot of owners earn less than $100,000; a lot are self-employed. There’s a simpler way.
But it’s challenging for small businesses, there are a bunch of different types of 401(k)s and IRAs. It’s pretty challenging to figure out which one is best for them.
In my business, where I help small employers figure out retirement, I run into examples where businesses were sold a 401(k) when an IRA would have been more affordable. There’s not a lot of awareness or support for implementing good IRA plans, especially since they don’t cost anything to set up and run.
A big fad in recent years has been allowing funds that use a so-called environmental, social and governance (ESG) framework to pick their investments. How do you feel about ESGs in 401(k)s?
Four or five years ago, I was at a big investment conference and the ESG issue was getting significant discussion. ERISA [a federal law setting standards for private retirement plans] requires employers to act solely in their employee’s best financial interest. One of the things I was pointing out was just because you’re getting pressure to allow certain things in plans, like ESG investments, that’s not a reason to add them in. You need to do what’s right for your client.
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