The 401(k) Turns 40: How A Small Provision Had Such A Large Impact
MARY LOUISE KELLY, HOST:
This week, we celebrate a special birthday. The 401(k) is turning 40. The 401(k) of course is a retirement plan offered by many employers. Roughly 40 percent of American workers use them. They are by far the most common form of retirement savings plan. But they are not without their critics.
Stacey Vanek Smith of Planet Money's Indicator podcast joins me. Hey there, Stacey.
STACEY VANEK SMITH, BYLINE: Hi, Mary Louise.
KELLY: The 401(k) is 40. And now that I am in my 40s, I like to think that's actually (laughter) not that old.
VANEK SMITH: Absolutely not very old at all.
KELLY: But remind me; what were we all saving our retirement money in before then?
VANEK SMITH: Most people who had a retirement plan had a pension plan where your employer would contribute money on your behalf into a retirement fund. And they'd invest that money for you and kind of take care of everything. These were really great for workers, but a lot of companies couldn't afford them. So even at their peak, only about a third of U.S. workers had a pension. And then in 1974, something changed that essentially just killed the pension.
KELLY: And this was a new law very sexily named ERISA.
VANEK SMITH: That is the Employee Retirement Income Security Act. Allison Schrager talked with me about this. She is a pension economist and a writer for Quartz.
ALLISON SCHRAGER: That made the defined benefit plans incredibly expensive to administer. It forced companies to actually fund these things properly. And people started living longer.
VANEK SMITH: So pensions started getting really prohibitively expensive.
KELLY: OK, you've set the stage for why things were ripe for change. How did the 401(k) emerge on the scene?
VANEK SMITH: That was because of Ted Benna, who calls himself the father of the 401(k). And in the late '70s, he was working at a benefits consulting company. And he spotted this obscure little section of the tax code, Section 401(k). What it did was allow companies to create a retirement plan where workers could contribute a portion of their wages tax-free. And it also allowed employers to match those contributions, and that match was tax deductible. Because pensions were dying, Ted said as soon as he saw this and realized the implications, he knew that this would be huge.
TED BENNA: This thing was going to catch fire. Very few of us, including me, when we're raising families and have all that responsibility have the discipline to every paycheck take a piece off the top and put it away and keep our sticky hands off of it. And the 401(k) makes that easier.
KELLY: And I love, by the way, that there's a guy who calls himself the father of the 401(k). You interviewed Ted Benna. Where is he now?
VANEK SMITH: He is retired on his 401(k). And he told me that he's not celebrating the birthday of the 401(k) because he is remodeling his house.
KELLY: Speaking of not celebrating the 401(k), I mentioned that there are critics who are not bought in that this is the most brilliant retirement savings plan ever. Why?
VANEK SMITH: First of all, there's a perception that the 401(k) killed the pension. I think honestly that economics and us living longer are the things that killed the pension. But 401(k)s do have a lot of problems. First of all, they put a lot of decisions in your hand as a worker. And those decisions can be really confusing and overwhelming, like how to invest your money if you want to be high-risk or low-risk. And also, if you do kind of jump in and decide, like, I'm going to do this; I'm going to invest my money and figure out where to put it, there are a lot of fees associated with 401(k) services. So they're definitely not perfect.
KELLY: So where does this leave us? Does the 401(k) have another 40 years in it?
VANEK SMITH: I think so. In fact, the Trump administration pushed through legislation that will allow small businesses to band together in order to afford 401(k)s. So there will be more companies and more small companies offering 401(k)s to workers. So I think we'll see a lot more of them.
KELLY: Stacey Vanek Smith of Planet Money's Indicator podcast talking about 40 years of the 401(k) - thanks, Stacey.
VANEK SMITH: Thank you.
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