Most people are unaware of how long the 401(k) has been around. To be honest, I didn’t know either until I did some research. Come to find out, the 401(k) was born 40 years ago with the passage of the Revenue Act of 1978.
The Father of the 401(k)
A man named Ted Benna is widely regarded as the father of the 401(k). Although many people have become very wealthy because of his Mr. Benna’s role in developing the plan, he did not receive a financial windfall for his work as what is typically expected. He unsuccessfully tried to patent the idea. As such, he does not receive a royalty every time a new employee decides to auto-enroll. Mr. Benna, age 76, lives a modest life on a small farm in rural Pennsylvania where he and his wife decided to move to 20 years ago, and in the process, “reduce our expenses by probably 50% by relocating from a big house in Philadelphia to a modest ranch-style home.” Mr. Benna credits saving in a 401(k) plan that he established for his company in 1981 with providing him a very comfortable, yet modest, retirement.
He recently published a 190 page book 401k – Forty Yeas Later (Xulon Press). The book provides good historical context, is fact based, and quite eye opening. In his book, Mr. Benna discusses the events that led to enactment of the legislation adding Section 401(k) to the Internal Revenue Code (IRC), the dismal long-term outlook on Social Security, and his ideas on the next unavoidable financial crisis. The original working title for this book was Escaping the Coming Retirement Crisis – Revisited.
The 401(k) has come a long way in 40 years. Actually, it’s hard to believe that an 869-word addition to the tax code would have such a dramatic impact on our retirement system.
How Large Are 401(k)s
According to the Investment Company Institute, more than $5 trillion sits in these accounts with more than 54 million American workers as active 401(k) participants.
Clearly, the 401(k) has proven to be an important instrument to help you prepare for retirement. It should definitely be used for retirement planning. However, I still admonish you to not put all your eggs in one basket. I discussed the reasons why you should diversify by also investing in real estate and other asset classes in a previous post.