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The Invention of the 401(k)

Several years ago, on a local radio program, I eulogized Ted Benna.  This week I discovered that rumors of his demise were greatly exaggerated, as the 74-year old Benna is apparently quite happy spending time in semi-retirement with his grandchildren and his horses.  My apologies go out to Mr. Benna, but the good news is that I’m pretty sure he wasn’t listening.

Why did I care about Mr. Benna than, and why should you care now?  Because Ted Benna was the recognized mover and shaker in the development of the ubiquitous 401(k) Plan, which over the past few decades virtually replaced the traditional pension plan.

But he has had his doubts.

Let’s start from the beginning.  Ted Benna was dealing with employers and executives who appeared to be more interested in saving taxes for themselves, than in helping their employees.  As a very religious man, this bothered Benna greatly.  In fact, he was considering leaving his job, when one day he found a relatively new section of the U.S. Tax Code – Section 401(k).

And the rest is history.

But it wasn’t all that easy.  Section 401(k) had been added to the Code primarily to limit the ability of executives to abuse cash-deferred plans.  Regulations were not clear, and were not fully clarified for another 10 years.  But Benna pressed on, gaining a meeting with Reagan Administration officials, and achieving enough regulatory clarification to put the Plans on the map.

Implementation began slowly, using the newly-formed Vanguard Group to invest the assets, so as to avoid conflicts of interest (remember how I tell you to have a third party custodian?).  Vanguard appears to have thrived, to put it mildly.

So with all that success, why did Ted Benna develop doubts about his own very successful creation?  Early on, the complexity of the 401(k) Plans afforded opportunities for high fees and bad decisions.  He believed that the executives were receiving a much greater benefit than were the employee participants.

This is now changing, and I find myself in one of the rare moments when I feel the need to praise the current Administration.  Transparency in the Plans, identification of true costs, more and improved investment options, and the new fiduciary standard, are all Administration and Congressional improvements designed to benefit the Plan participants.

George W. Bush praised the 401(k) as one of the basic components of the “ownership society,” of which he was so proud, and to which he made contributions, though some were actually dismal failures (think: mortgage lending standards reduction).  The net change over the years, however, was, in my opinion, a stunning improvement in the ability of the average individual to develop, preserve, and eventually to pass on, accumulated wealth.

Perhaps less obviously, the 401(k) has created a tremendous amount of capital for investment in business and industry.  This happens through investments by Plan participants in stocks and bonds.  (Note to Bernie Sanders, elected Democrats, and young people everywhere – capitalism works for everyone.)

As an example of capital creation, I cite a Wall Street Journal article from January 25, 1982, about the “finding” of the 401(k) tax provision.  It was an explanatory piece, but that isn’t really important right now.  In the inset was the market data for the day.  The DJIA opened the day at a whopping 845; it stands today at 17,500.  Nice run!  Imagine the capital needed to create a market increase of that magnitude.  The creation of investors through the 401(k) and IRA savers has helped to propel this growth.

Now a few personal observations:

  • Pensions were thought to be safe, but in reality many went broke, and the pensioners suffered
  • Interest in the markets has improved the financial literacy of the populace
  • New industries arose from the opportunities presented by the 401(k) world (our Investment Advisory, for instance)
  • Financial planning in general became more sophisticated due to Benna’s push
  • We are now faced with dangers from the same Administration that has so far helped the average participant
  • The push to further control the investments within the Plans is alive and well, and did not go away with the retirement of Senator Tom Harkin
  • Everyone needs to understand the dangers of government interference in our personal quest for financial independence
  • Listening to this show will help, but we need to constrain political “do-gooders”
  • Better than listening is calling the show to discuss your questions, concerns, and ideas
  • Anything we call all do to raise awareness and literacy will help people everywhere

In closing, I will offer one more apology to Ted Benna for my erroneous prior eulogy.  I intend to replace it with a congratulatory note from the industry and the people who have benefitted greatly from his diligence.  His is truly an accomplishment.  I hope his grandchildren one day have the same appreciation that I do.