In the fall of 1978, Congress added Section 401(k) to the Internal Revenue Code. The provision was used primarily by senior executives looking to supplement their pensions. A neat idea, at least for a relatively few people. Mostly lost to history was the fact there was nothing in the legislation’s scant one-and-a-half pages that suggested employers could create a tax-advantaged savings account for their employees.
But nothing said they couldn’t, either.
Enter Ted Benna, a Pennsylvania-based benefits consultant. By Mr. Benna’s novel interpretation of Section 401(k), employers could indeed use matching contributions to encourage contributions from lower-paid employees. A great idea for a lot of people. In the years following Mr. Benna’s eureka moment, the Feds eventually sanctioned his clever scheme. In 1981, the IRS issued rules that allowed employees to contribute to their 401(k) plans through salary deductions.
And the 401(k) business as we know and love it today launched.
Four decades later, 401(k) plans have grown to become the most common type of employer-sponsored defined contribution (DC) retirement plan in the U.S. In 1980, just 8% of Americans contributed to a DC plan. Today that number is around 50%. According to the Investment Company Institute, 401(k) plans hold around $7.4 trillion in assets on behalf of some 70 million active participants, former employees, and retirees. The median amount in a retirement account per family has tripled in real terms since 1989.
Pension plans in the private sector, meanwhile, have become increasingly rare.
Which brings us to the National 401(k) Day. Created by the Plan Sponsor Council of America, the day is celebrated on the Friday after Labor Day. Why? Because, according to the council’s website, “Americans start the week focused on labor and can end it with retirement.” Nice. In recent years, the honorary day has transformed to focus on retirement plan education as well as financial wellness.
The investment vehicle of choice typically for retirement investors? Mutual funds. Diversified, professionally managed, and generally cost-effective, domestic equity funds, international equity funds, and domestic bond funds are offered on nearly all plans today. The great news is plan participants are incurring substantially lower fees for holding mutual funds over the past two decades. Research shows that the average equity mutual fund expense ratio paid by 401(k) investors dropped by more than half from 2000 to 2023, suggesting higher returns and higher balances in retirement.
Better yet, it’s getting easier to start saving.
Reportedly, 60% of companies in the U.S. offer 401(k)-type plans today, the majority offering automatic and immediate enrollment. Most 401(k) plans in today’s market have so-called auto-escalation features that increase the savings rate each year without manual intervention.
For their part, many top-line mutual fund companies are well-equipped these days to help educate 401(k) participants on how to invest their accounts, with an emphasis on the crucial role of asset allocation and rebalancing to keep their accounts consistent with their investment objectives. Wealth advisors and retirement plan services consultants are prepared to help businesses and institutions build quality retirement plans.
This year, National 401(k) Day falls on September 6—this Friday. No better time than now to ensure you are taking full advantage of a retirement strategy so outstanding it has its own day.
SEE ALSO: