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The History of the 401(k)

Many of you probably didn’t realize that this Friday, September 9, is national 401(k) Day. While this day may not require the sending of a Hallmark card to friends or loved ones, it does give us a chance to look back at the origins of the 401(k).

The story starts in 1978, when computers looked like this and “tweeting” was something only birds did.  An enterprising lawyer and benefits consultant, Ted Benna, was researching ways to streamline a cash-bonus plan for a client when he discovered a “loophole” in the U.S. tax code. This discovery allowed Benna to construct a way for employees to defer part of their pretax salary for retirement rather than have the employers defer retirement benefits. While that particular client passed on Benna’s suggestion, the basis of the 401(k) was born.

 

The story continues in 1981 with the IRS proposing regulations on Section 401(k) of the tax code, officially sanctioning pretax salary reductions and legitimizing what we know of as the 401(k). In essence, the IRS was giving the green light to the 401(k) plan.

This new plan brought about a drastic change in how employers handled retirement savings for their employees. Instead of offering a retirement pension to employees, employers started putting the employees in charge of saving for their retirement through the use of a 401(k) plan. This shift in philosophy, along with new regulations making 401(k)s a more attractive plan option , allowed for 401(k) plans to grow exponentially.

The EBRI graph below illustrates how 401(k) type plans have taken off since their introduction.

The 401(k) has become a powerful savings and investing tool benefiting both employees and employers. What started out as a plan to help a business stay competitive has transformed into the most widely used retirement investment plan in American and we look forward to celebrating its big day.

Evan Davis

Marketing Associate

Not it’s your turn. Are there any other interesting 401(k) facts you know about? Let us know in the comment section