In 1981, Ted Benna created the first 401(k) plan, which allowed corporations to contribute, tax-free, to workers' retirement accounts. Benna explains how an obscure tax-code provision led to our current financial planning for retirement.

Washington

Ted Benna, co-owner of a small insurance company near Philadelphia, is credited with creating the first 401(k) plan in 1981. This idea originated from an obscure provision in the tax code, added in 1978, which allowed corporations to make tax-free contributions to employees' retirement accounts. The inception of the 401(k) plan represented a pivotal moment in retirement planning, shifting the onus from pension plans provided by companies to self-managed retirement savings by individuals.

The transition from traditional pensions to 401(k) plans has resulted in a learning curve for employees, particularly noticeable among Generation X, identified by Benna as the first group needing to actively manage their retirement accounts. Unlike automatic pension plans, 401(k)s require individuals to make informed decisions about their contributions. Over time, legislation has made 401(k) plans more accessible, with automatic enrollment and contribution increases, which helps employees navigate the complexities of retirement planning.

Despite improvements to the system, Benna acknowledges the inherent unpredictability of financial markets and the challenges they pose to 401(k) holders seeking stability in retirement savings. After over four decades since his pivotal role in 401(k) development, Benna himself has transitioned his savings from a 401(k) to an IRA, underscoring the complexities involved in retirement planning. Still active at 83, Benna highlights the continuous evolution of retirement planning and the persistent need for individuals to engage proactively in securing their financial futures.



The birth of the 401(k)

If you've recently been spending lots of time thinking about your retirement account, you can probably thank this unassuming 83-year-old. I've heard you described as the father of the 401K. Is that true? Are you requesting a paternity test? Actually, that label was given to me by Money Magazine. You were working in this office park when the idea came to you? That's correct. Was it a little idea that changed the country? It could have been anywhere. Meet Ted Benna. He created the first 401K plan in 1981. And you didn't get to name it, right? You would have probably chosen something catchier. 401 is a section of the IRS code that covers all retirement plans. And you go paragraph A, B, C. What happened was, in 1978, they added paragraph K. So like all the best stories, this one starts with a revision to the tax code. Exactly. Back then, as co-owner of a small insurance company outside Philadelphia, Benna noticed an obscure provision in the code that allowed corporations to contribute tax-free to workers' retirement accounts. You're imagining that it's going to supplement the pension, and instead it turns out to kind of replace the pension. That's been the result. It's not a good thing that companies have abandoned pension plans. But that was going to happen, frankly, whether there's 401K or not. Benna says the 401K was attractive to employers who wanted to get out of the pension business. But for employees, there was a learning curve. Generation X was like the guinea pigs. And they're kind of the first generation that is in this world where all of a sudden you've got to figure out your own retirement. You've got to take an active role. Yeah. It's scary. I'd say the major reason it's scary is just educationally. They weren't given financial courses. I mean, it seems like one difference between a 401K and a traditional pension is that the traditional pension is automatic. The 401K, it requires a little bit of knowledge and attention, and the employee has to really kind of take ownership of that a little bit. Yeah. It's changed to some degree, fortunately. And the reason why it's changed is there's been legislation enacted now that if you have a plan, employees are auto-enrolled, you know, and I help support that legislation. And also your contributions are going to be automatically increased. They've kind of idiot-proofed the 401K. Well, and that's recent, you know, so that's certainly going to help going forward. A 401K can be idiot-proof, but it can't be market-proof, as the recent financial chaos has demonstrated. What most people want when they think about retirement is stability, predictability. And that's not generally what the stock market provides. No, it's absolutely a problem in the bond market either. You know, the bond market is oversold as being more stable. A lot of people are really nervous about the performance of their 401Ks. How's yours doing? I don't have any in a 401K. You no longer have a 401K. I rolled it, yeah, rolled it into an IRA. Forty-four years after inventing the 401K, Ted Benne is still planning for the future. As someone who helped a generation save for retirement, how did you think about your own retirement? Well, at 83, I'm not retired yet, so. Am I wrong to see this as you conspicuously failing to practice what you preach? Yeah, probably.

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