In the 1978 Revenue Act passed by the United States Congress, a small provision was inserted into the Internal Revenue Code called Section 401(k). Section 401(k) allowed employees to avoid taxation on deferred compensation. Although the tax code can be overwhelming, a man named Ted Benna noticed the new provision and decided to pitch it to companies as a way to provide retirement income for their workforce. As mentioned by Northwestern Mutual, in 1981 the IRS created new rules that established payroll deductions for employees.
When Ted Benna figured out that this small provision could be used as a retirement vehicle for employees, workers in the private-sector at that time were typically offered a defined-benefit pension, if offered a retirement benefit at all. A few years after his discovery, the tide began to change in the private-sector as companies saw the 401(k) as a replacement retirement product, creating an opportunity to move away from defined-benefit plans. As of 2018, 51 percent of private-sector employees were offered a 401(k) plan, 13 percent were offered both a defined-contribution plan and a defined-benefit plan, and just 4 percent were offered a defined-benefit plan solely.
So what does Ted Benna think of what he created? In 2011, he called it a “monster” because the modern 401(k) is too complex. He cited not only the complexity but the lack of education available for employees, such as not understanding an employer match often left “free” money on the table, nor understanding the need to develop a plan, such as investing in riskier assets when you’re younger and safer assets when they’re closer to retirement.
In an article published by Forbes in December 2021, Benna admits that the 401(k) has shortcomings. Currently, Benna runs a business that helps small businesses develop their retirement plans. Instead of continuing to advocate for 401(k) plans for small businesses, he now recognizes that Individual Retirement Accounts (IRAs) have no start up fees and typically cost less to manage than 401(k)s.
Beyond what Benna mentioned in these two articles, 401(k) plans place workers at the whim of the market, often with little education provided. After the Great Recession and the recession caused by the coronavirus pandemic, many saw their retirement savings decimated. Whereas pensions are a retirement plan that pools workers’ assets and offers a monthly retirement benefit for life.
In the public sector, defined-benefit pension plans remain the standard for good reason. Public employees, on average, make less than they could in the private-sector. Their pensions are a promise to them after a career in service to their communities. As of 2018, 86 percent of state and local public sector employees had access to a defined-benefit pension plan, and of those workers, 77 percent participated in the plan.
As readers of Defined-Benefit know, pensions provide a more secure retirement to public employees, and as Benna stated before, 401(k)s are a “monster” that Congress created by accident.