It doesn’t look a day over 39. An obscure section of the IRS code has ballooned into America’s premier savings vehicle, and today officially turns age 40. The 401(k), and it’s potential, was by all accounts first identified and run with by Ted Benna, the so-called “father of the 401(k).”
“The regulations came out in 1978, but they weren’t effective until January 1980,” he explains. “Now on Jan. 1, 1980, there weren’t advisors running around selling these plans; there weren’t mutual fund wholesalers and similar people like there are today.”
It wasn’t until later that year when Benna says he was developing a retirement plan for a bank client in Philadelphia that he added a matching contribution as well as “the pre-tax salary reduction.”
“Nowhere did it say I could add these provisions, but nowhere did it say I couldn’t either,” he quips. “I’d been discussing it with an official and he didn’t say one way or another, but from our conversations I was pretty confident that the final rules would allow for them, which they did.”
The Philadelphia bank ultimately passed on the idea because, unsurprisingly, their attorney didn’t want them to experiment in that way, so Benna and his colleagues at the small consulting firm tried it themselves.
The rest may be history, but the innovation and growth continue. Investment Company Institute (ICI) recently looked at 401(k)s today:
- Americans held $7.7 trillion in DC plans at year-end 2017, accounting for 27 percent of the $28.2 trillion in retirement assets and about 9 percent of household financial assets. Sixty-nine percent of DC plan assets, or $5.3 trillion, were held in 401(k) plans, accounting for 19 percent of all US retirement assets.
- At year-end 2016, 38 percent of 401(k) participants were in their twenties or thirties, 25 percent were in their forties, 25 percent were in their fifties, and 11 percent were in their sixties.
- Nearly half of US households with DC retirement plan accounts had moderate incomes. Forty-nine percent of households owning DC accounts in mid-2017 had incomes between $25,000 and $99,999. Forty-seven percent of households with DC assets reported incomes of $100,000 or more and 4 percent had incomes less than $25,000.
- Most DC account–owning households agreed that employer-sponsored retirement accounts helped them “think about the long term, not just my current needs” (91 percent), and that “payroll deduction makes it easier for me to save” (92 percent).
- In 2015, employers made contributions in 78 percent of 401(k) plans. Because larger 401(k) plans are more likely to have employer contributions, 89 percent of 401(k) plan participants.
- Data from the 2016 EBRI/ICI 401(k) database indicate that 54 percent of 401(k) plans offered a plan loan provision to participants, and 86 percent of participants were in plans offering loans. However, relatively few participants made use of this borrowing privilege.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 401(k) Specialist and Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots. Experienced financial services content executive specializing in creative new media delivery. He joined the American Retirement Association in 2023 as Chief Content Officer, overseeing communications for the organization, as well as its sister organizations.